Partnerships

Question 1

What is a Partnership?

Answer 1

A relationship between at least two persons, legal or natural, carrying on a business in common with a view to making a profit.

Partnership Act (“PA”) 1890 — s. 1(1).

This arises regardless of intention. Evidence of profit sharing and collective decision-making are strong indicators of a partnership.

Question 2

Does a Partnership have Limited Liability?

Answer 2

No, for it has no legal personality.

Question 3

What is a Limited Liability Partnership?

Answer 3

A Partnership with distinct legal personality.

Question 4

What are the Commercial Advantages of a Partnership?

Answer 4

• Pass-through taxation.
• Greater confidentiality.
• Limited liability (for LLPs).
• Greater organisational flexibility.
• Fast, simple, and cheap formation.

Question 5

What is the Type of Relationship between Partners classified?

Answer 5

Fiduciary.

PA 1890 — s. 28-30.

Question 6

What is the nature of Partners’ liability in Contract and Tort?

Answer 6

• In Contract, Partners are jointly liable.
• In Tort, Partners are jointly and severally liable.

PA 1890 — ss. 9-12.

A new Partner will not automatically be liable in relation to debts incurred by the Partnership before joining. A retired Partner will still be liable in respect of debts incurred by the partnership during their tenure.

Question 7

What must a Retiring Partner do to avoid Liability after Departure?

Answer 7

• Provide actual notice to any Party they have dealt with; and
• Provide constructive notice to all by virtue of publicising their departure in the London Gazette.

PA 1890 — ss. 36.

A former Partner will not be liable for debts to any third party who did not know them to be a Partner before they left.

Question 8

When may a Non-Partner be held Liable for a Partnership’s obligations?

Answer 8

When they hold themselves out as a Partner or knowingly allow themselves to be so held out. In other words:

• The Person represents to a Third Party that it is a Partner.
• The Third Party honestly believes the representation and commercially relies thereupon.

PA 1890 — s. 14.

Question 9

When can a Partner bind a Partnership?

Answer 9

At any time in the course of business, unless:

• The Partner is unauthorised to act on a given issue; and
• Its Counterparty knows it is unauthorised or does not know or believe the person to be a Partner.

Question 10

When can a Non-Partner bind a Partnership?

Answer 10

When they have actual, express, implied, or apparent authority to bind the Firm.

Question 11

What is a Partnership Agreement?

Answer 11

The document governing how the Partnership will be run.

At a minimum, this includes provisions on:
* Commencement and duration.
* Partnership name and place of business.
* Partnership property.
* Capital, PNL sharing and ratios.
* Drawings / Salary.
* Remuneration.
* Accounts.
* Dissolution of the partnership, automatic and otherwise.
* Duties, powers and restrictions on partner.
* Work input and roles.
* Limits on the authority of partners.
* Partnership decision making.
* New partners.
* Retirement / expulsion of existing partners.
* Non compete / other restrictions.

Question 12

What are the Default Provisions governing Partnerships?

Answer 12

§20 —Ownership of Property Brought into the Firm:

• All property brought into the Firm on its account or in the course of business is Firm Property, and each Partner is deemend to own an equal share therein.

§21 —Ownership of Property Bought with Firm Funds:

• All property bought with the Firm’s money is deemed to be Firm Property, unless the contrary is shown.

§24(1) —Equality in Capital, Profits, and Losses:

• All Partners are entitled to share equally in the Firm’s capital and profits, and to contribute equally towards its losses.

§24(5) —Managerial Equality:

• Every Partner may take part in the Firm’s management.

§24(6) —Lack of Remuneral Entitlement:

• No Partner is entitled to remuneration.

§24(7) —Unanimity for New Appointments:

• No person may be introduced as a Partner without unanimous consent.

§24(8) — Varying Thresholds for Decision-Making:

• Ordinary decision-making is by majority vote of Members, but proposed changes to the nature of the Firm’s business requires unanimous consent.

§25 —Unanimity for Expulsions:

• No Partner may be expelled without unanimous consent.

§26 —Default Dissolution upon Departure:

• Where no fixed term has been agreed for Partnership, it will be Dissolved by any Partner leaving.

§30 — Account of Profits for Commercial Competition:

• If a Member, without consent, commercially competes with the Firm, they must account for any and all profits.

§44(b)(3) —Proportionate, then Ratable, Winding Up:

• Upon Dissolution, once all debts are settled, remaining assets will be distributed according to initial contribution, then equally.

PA 1890.

Question 13

What are the Default Provisions governings LLPs?

Answer 13

R. 7.1 —Equality in Capital, Profits, and Losses:

• Members share equally in capital and profits.

R. 7.2 —Indemnification for Honest Liabilities:

• The Firm must indemnify its members for payments made and personal liabilities incurred in the proper course of business.

R. 7.3 —Managerial Equality:

• Every Member may take part in management.

R. 7.4 —Lack of Remuneral Entitlement:

• No Member is entitled to remuneration for managing the Firm.

R. 7.5 —Unanimity for New Appointments:

• No person can become a Member or Assign membership without unanimous consent.

R. 7.6 — Varying Thresholds for Decision-Making:

• Ordinary decision-making is by majority vote of Members, but proposed changes to the nature of the Firm’s business requires unanimous consent.

R. 7.7 —Mandatory Accessibility of Firm Records:

• The Firm’s records must be availble for inspection by the Members at its registered office.

R. 7.8 — Obligation of Full and Frank Disclosure:

• Each Member must give true accounts and full information of all things affecting the Firm to any other Member or their legal representative.

R. 7.9 —Account of Profits for Commercial Competition:

• If a Member, without consent, commercially competes with the Firm, they must account for any and all profits.

R. 7.10 —Account of Benefits from Firm Transactions:

• Every Member must account for benefits derived from transactions with the Firm and its business or property.

R. 8 —Express Requisite for Explusion by Majority:

• Members cannot be expelled by majority vote unless expressely provided for in the Partnership Agreement.

The Limited Liability Partnerships Regulations (“LLPR”) 2001.