Partnerships Flashcards
When does a general partnership come into existence?
A partnership comes into existence when two or more persons are ‘carrying on a business in common with a view of profit’.
When is a general partnership not formed?
Agreeing to work together in partnership is not sufficient if working together does not constitute carrying on a business in common.
What effect does the Partnership Act 1980 have?
This provides a default contract for partnerships in the absence of a partnership agreement.
Who can be partner to a general partnership?
Individuals and companies. A partnership may have sleeping partners.
What professions and size can general partnerships operate in?
Any trade and size (even multinational firms), provided there are at least two partners.
Explain the management of a general partnership
All partners make management decisions.
What is the position regarding losses of a general partnership?
There is unlimited liability. Partners are jointly and severally liable for the debt of the partnership.
What does ‘jointly and severally liable for the debt’ mean?
A creditor can sue any of the partners for the full amount of the debt owed.
What are ‘partnership assets’?
These are assets owned by a partner, but used by the firm. A partnership does not have SLP so cannot own assets.
Why is unlimited liability less of a concern for some industries? Which industry?
Law firms. The biggest liability a law firm is likely to face is a claim for professional negligence but this is usually covered by insurance. This is why many firms have operated as partnerships.
How are general partnerships taxed?
Individual partners - they are self-employed so will pay income tax on their share of the profits and CGT where appropriate
Company partners - corporation tax on their share of the profits.
What factors are to be considered to determine the existence of a general partnership?
S2 Partnership Act 1980:
o Do the individuals all take part in decision-making?
o Whose names are on the title deeds of any property?
o How are profits shared?
o Who has contributed capital?
o Who is involved in management of the business?
o Do they share responsibility for the business?
o Who owns the partnership assets?
These are not conclusive but may be indicative.
Under the Partnership Act 1980, what is the default provision regarding commencement of a partnership?
The partnership commences when two or more persons are ‘carrying on a business in common with a view of profit’
Under the Partnership Act 1980, what is the default provision regarding duration of the partnership?
If work continues beyond the expiry of the fixed term and the partners do not enter into a new agreement then it is presumed that they will be bound by the same terms as before
Under the Partnership Act 1980, what is the default provision regarding work input?
Partners may take part in management of the business but are not required to do so.
Under the Partnership Act 1980, what is the default provision regarding decision making?
All decisions must be taken by the majority, with the exception of the following which must be taken unanimously:
o Changing the nature of the business
o Introducing a new partner
o Changing the terms of the partnership agreement
Under the Partnership Act 1980, what is the default provision regarding competition?
Implied non-compete clause:
If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.
Under the Partnership Act 1980, what is the default provision regarding capital and income profits?
All capital and income profits are to be shared equally (regardless of work input).
Case law suggests a partner may be able to argue that there is an implied term that the partners own capital profits in accordance with their initial capital contributions.
Under the Partnership Act 1980, what is the default provision regarding losses?
All losses are shared equally.
Under the Partnership Act 1980, what is the default provision regarding drawings?
All drawings are to be split equally.
In a general partnership where the default provisions apply, which decisions need to be taken unanimously?
o Changing the nature of the business
o Introducing a new partner
o Changing the terms of the partnership agreement
In a general partnership where the default provisions apply, what may be the position in relation to capital profits?
Case law suggests a partner may be able to argue that there is an implied term that the partners own capital profits in accordance with their initial capital contributions.
What is ‘capital contribution’?
Money partners put into the business
What are ‘capital profits’?
One-off gains i.e. an office building increasing in value
What are ‘income profits’?
Profits recurring in nature i.e. trading profit, rent received
Under the Partnership Act 1980, what is the default provision regarding partners’ salaries?
Partners are not entitled to a salary.
What are drawings?
money or other assets taken out of the business
Under the Partnership Act 1980, what is the default provision regarding introduction of a new partner?
A new partner cannot be introduced without the consent of all partners
Under the Partnership Act 1980, what is the default provision regarding expulsion?
A partner cannot be expelled
What is meant by the dissolution of a general partnership?
Dissolution means the end of the partnership, this doesn’t necessarily mean they have stopped trading but the specific contractual relationship between the partner has come to an end
What does it mean when a general partner retires?
A partner leaves a partnership (it has nothing to do with old age retirement, pension etc)
What rights does a retiring general partner have?
- They can insist on the business being sold
- They are entitled to either interest at a rate of 5% per annum on the value of their partnership share until they receive their share from the other partners, or a sum ordered by the court which reflects the share of profits attributable to their share
When is a general partnership dissolved?
o A partner retires
o Expiry of a fixed term
o Completion of an undertaking/adventure
o A partner giving notice of his intention to dissolve the partnership
o Death of a partner
o Bankruptcy of a partner
o If a partner’s share of the partnership property is charged under PA 1890 by the court for their separate debt, the other partners may service a notice of dissolution on that partner
o Something happens which makes it unlawful for the business to be carried on i.e. losing a licence the partnership needs to operate
o By court order
What provisions of the Partnership Act 1980 cannot be disapplied under partnership agreement?
- The commencement of a partnership i.e. the partnership commences when two or more persons are ‘carrying on a business in common with a view of profit’. This is the case even if a partnership agreement states a commencement date.
- Dissolution of a partnership where something has occurred which makes it unlawful for the partnership to carry on.
What are the requirements for a partner to dissolve a general partnership?
There are no time or notice requirements so a partnership can be dissolved with immediate effect.
Explain why it is important to determine the commencement of the general partnership
The partnership agreement may specify a commencement date, but a partnership will always commence when two or more persons are ‘carrying on a business in common with a view of profit’. So if the partners start work before the date of the agreement, that will be the date the partnership formed.
When can general partner(s) apply to the court to have a partnership dissolved?
If the partnership is solvent, and either:
o A partner comes incapable of performing part of their partnership contract
o Their conduct is prejudicial to the business
o A partner wilfully / persistently breaches the partnership agreement
o The partnership can only be carried on at a loss
o The court thinks, for other reasons, it is just and equitable to order the partnership to be dissolved.
How are the proceeds of sale applied when a general partnership is sold?
o Creditors are paid in full (if there is any shortfall, partners are personally liable to pay)
o Loans and interest made by partners to the firm
o Each partner’s capital contributions
o Any remaining money is shared equally
Who has the authority to act when a general partnership is winding up its affairs?
Any partner, unless they are bankrupt.
If the partner is bankrupt or deceased, the trustee in bankruptcy or PR can make an application
What terms can partners not agree under a partnership agreement?
o When the partnership comes into existence
o The relationship between partners and third parties
o Dissolution of a partnership when something happens which makes it unlawful for the business to be carried on
What terms can partners agree under a partnership agreement?
Partners can agree any specific terms except:
o When the partnership comes into existence
o The relationship between partners and third parties
o Dissolution of a partnership when something happens which makes it unlawful for the business to be carried on
What format can a partnership agreement take?
o Oral;
o Written; or
o Implied
What should a partner do if they do not want the default provisions to apply?
They will need to enter into a partnership agreement.
In addition to the default provisions, what other clauses will the partners need to consider when drafting a partnership agreement?
o Name
o Place and nature of business
o Dispute resolution
o Restraint of trade
o Goodwill clauses
o Expulsion clause (important to avoid needing to rely on court ordered dissolution)
o Ownership of assets
o Decision-making i.e. a voting system
o Each partner’s role & required work input
Are there any limits to a general partnerships trading name?
Yes, similar rules to companies. It also cannot include any reference to LTD, PLC or LLP.
What common law duties to general partners owe to one another?
Duty of fairness and good faith to one another
What statutory duties to general partners owe to one another?
o Must be completely open and honest with one another regarding any relevant information about the partnership
o Must account to the firm for private profits they have earned without the other partners’ consent from a transaction concerning the partnership
o Must not compete with the partnership without the other partners’ consent
o Indemnify other partners who have borne more than their share of any liability connected with the partnership
If a general partner earns profits without the other partners’ consent, what must they do?
Pay all profits to the partnership.
If one general partner is sued by a creditor, what must the other partners do?
Indemnify other partners who have borne more than their share of any liability connected with the partnership
When will a partnership be bound by a contract?
If it was entered into by partner(s) or employee(s) with actual or apparent authority.
What is the position if a general partnership entered into a contract with no authority?
The partner will be personally liable to the contract
What are the types of actual authority?
- Joint actual authority.
- Express actual authority.
- Implied actual authority.
What is joint actual authority?
The partners acted jointly in making the contract
What is express actual authority?
Express permission is given i.e. in the partnership agreement or as part of another agreed decision
What is an example of express actual authority?
One partner has the responsibility under the PA to purchase raw materials. If they do so, they would be acting with actual authority and bound by the contract.
What is implied actual authority?
An partner is assumed to have the authority to act on behalf of a partnership, even though they have not been officially told they have that authority.
Examples of implied actual authority:
Implied by partner’s regular course of dealing
Other partners have not objected to previous past actions
If all partners run the business without any limitations it may be implied they have the authority to sell the firm’s products in the ordinary course of business
What is apparent authority?
The partner does not have actual authority, but it appears to an outsider that they have authority. Even if it has been agreed between the partners that they would not do something, if a partner does it anyway the firm will still be bound if the requirements are met.
What are the requirements for apparent authority:
o The transaction relates to the firm’s business;
o It is a transaction the partner would be expected to have authority to make;
o The other party did not know the partner did not have authority;
o The other party knows/believes the person they are dealing with is a partner
What is the effect if apparent authority is established?
The partner is liable to indemnify their fellow partners for the loss incurred.
What is the position on tortious liability and general partnerships?
The partnership as a whole (as well as the individual) can be liable for a single partner’s wrongful act or omission performed in the course of business that amounts to loss or injury of another person that is not a partner
What is the position in relation to a new general partner and partnership debts?
New partners are not liable for any debts incurred before they joined (subject to any novation agreement)
What is the position in relation to retired general partners and partnership debts?
If the debt was incurred whilst they were a partner, they are liable (unless there is a novation agreement).
If the debt was incurred after they retired, they are not liable if s36 PA was complied with
What is the position regarding liability for partnership debts?
Any liable partners (inc. any retired liable partners) are jointly and severally liable
What is a novation agreement?
A novation agreement is an agreement between the retiring partner, partnership and creditor that the retiring partner is discharged from the existing liability.
If there is not a new partner coming in, then there must be consideration for the creditor’s promise to release the retiring partner or the contract must be executed as a deed.
What must a retiring general partner do to avoid liability for debts incurred after they have left the partnership?
- Satisfy the notice requirements
- Not held themselves out as a current partner, to which another party has relied on (this applies even if they were never a partner)
The partner must do both or they will be liable.
What are the s36 notice requirements for a retiring partner?
Actual notice of the partner’s retirement must be given to anyone who had dealings with the firm (i.e. they are directly informed, e.g. not by newspaper)
Constructive notice of the partner’s retirement must be given to everyone else (i.e. by placing a notice in the Gazette)
NB: no notice is required if they die or are bankrupt
What is the position under s36 if a general partner has died or is bankrupt?
They need not give notice.
How could a general partner hold themselves out?
- Orally,
- In writing (i.e. leaving the person’s name on headed paper or on the website);
- By conduct
Who can make the representation? (s36)
The retired partner or another person, if the representation was made with the retired partner’s knowledge
What is a summary of holding out?
If the creditor can establish that someone held themselves out or allowed themselves to be held out as a current partner, that they relied on the holding out and that they gave credit to the firm as a consequence will be able to sue that person for the debt owed by the firm.
What is the position of liability for general partnerships?
All partners are personally liable for any debts incurred. They are jointly and severally liable.
If one (or more, but not all) partner is sued for the debt, what can they do?
Seek an indemnity from the other liable partners
In terms of liabilities for debts, what should a retiring partner do? What is the effect of this action?
A retiring partner should leave some of their partnership assets to settle their portion of any debts liabilities.
This does not prevent a third party from taking future action against them, but the remaining partners could not seek an indemnity from the retired partner (as they would have already paid).
The retiring partner could seek an indemnity from the remaining partners.
What happens when a partnership is insolvent?
- Can be wound up as an unregistered company
- Can use rescue procedures i.e. voluntary arrangements, administration procedure
- Individuals can be bankrupt (but not the partnership itself)
Explain the formation of a limited partnership
There must be at least 1 general partner, the rest can be limited partners
What is meant by a ‘general partner’ in a limited partnership?
They have unlimited liability
What is meant by a ‘limited partner’ in a limited partnership?
They have limited liability
What rules must the limited partners in a limited partnership adhere to?
oThey cannot control or manage the LP
oThey cannot have the power to take binding decisions on behalf of the LP
oThey cannot remove their contribution to the LP for as long as it is in business
What happens if the limited partners to a limited partnership breach the rules?
They are treated as general partners, and so lose limited liability protection
Explain the management of a limited partnership
The general partner(s) have full management of the company but unlimited liability.
The limited partner(s) have no involvement with the management of the company but have limited liability.
What administrative requirements are there to start a limited partnership?
It must be registered with the Registrar of Companies, there is a cost to this. There are no formal requirements once established.
How is a limited partnership taxed?
Individuals - income tax & CGT where applicable
Companies - corporation tax
What does the Limited Liability Partnerships Regulations 2001 do?
Provide a default contract for LLPs in the absence of an agreement
Explain the position regarding publicity of information in a limited partnership
Must reveal certain information to the public i.e. some financial information
Explain the management of a limited liability partnership
There is no division between ownership and management.
Do limited liability partnership has SLP?
Yes. So owners have limited liability.
What are the start up requirements for a limited liability partnership?
It must be incorporated by filing Form LL 1N01 at Companies House with the applicable fee.
Any LLP agreement need not be filed.
What must be filed to incorporate an LLP?
Form LL 1N01 at Companies House with the applicable fee.
Any LLP agreement need not be filed.
When does an LLP come into existence?
At the date of incorporation certificate
Explain the tax position for an LLP
Individuals they are self-employed and so pay income tax and CGT (where applicable)
Companies pay corporation tax
What form must the name of the LLP take?
It must end in LLP or limited liability partnership (or Welsh equivalent)
There are similar name restrictions as with companies (unless the LLP’s name consists wholly of all the partners’ names)
what can be a LLP?
A profit-making business. Charities cannot take the form of an LLP.
What are the membership requirements for an LLP?
There must be at least 2 members at all times and at least 2 members must be designated members
What happens if, for some reason, there ends up being only 1 member to the LLP?
If there is only 1 member for more than 6 months, the member becomes jointly and severally liable for any of the LLP’s debts from the 6 months mark
What is the role of the designated members?
They have have additional duties and responsibilities i.e.:
Signing and filing annual accounts with ROC;
Appointing, removing and renumerating auditors;
Filing the annual confirmation statement;
Sending notices to the ROC;
Winding up the LLP
They also owe a duty of reasonable skill and care to the LLP
What duty do the designated members owe to the LLP?
A duty of reasonable skill and care
What are the rules in relation to the LLP’s office?
They must have a registered office which appears on the stationary
What duty do all LLP members owe to the LLP?
A fiduciary duty
What does a fiduciary duty consist of?
o A duty of good faith
o A duty to account for money received on behalf of the LLP
o A duty to other members to render true accounts and full information relating to the LLP
What are the possible consequences for breach of fiduciary duty?
A director or LLP member could be disqualified
What must the LLP do when a new member joins?
File Form LL AP01 (for an individual) or Form LL AP01 (for a corporate body) with Companies House within 14 days of appointment
What must the LLP do when a member leaves?
fILEForm LL TM01 (for an individual) or Form LL TM02 (for a corporate body) must be filed at CH within 14 days
In a LLP where the default provisions apply, is the position in relation to profits?
Members share capital and profits equally
In a LLP where the default provisions apply, is the position in relation to losses?
There is no provision regarding losses as these are borne by the LLP itself – members will only lose capital contributions/loans to the company
In a LLP where the default provisions apply, is the position in relation to management?
Every member may take part in the management of the LLP, but they are no obliged to
In a LLP where the default provisions apply, is the position in relation to renumeration?
Members are not entitled to renumeration
In a LLP where the default provisions apply, is the position in relation to decision making?
Decisions can be made by the majority, with the exception of the following which must be made unanimously:
oChanging the nature of the business
oChanging the terms of the LLP agreement
In a LLP where the default provisions apply, is the position in relation to expulsion?
Members cannot be expelled
What requirements are there for an LLP member wanting to retire?
They must give reasonable notice.
Re LLPs, what is the position in relation to ownership of assets and liabilities?
As the LLP has SLP, it can legally own assets and liabilities in its own right
Re LLPs, what is the position in relation to debt finance?
LLPs can raise debt finance by debentures and fixed and floating charges
Re LLPs, what administrative requirements are there in relation to charges?
LLPs must keep a register of charges at its registered office, the register should include all charges affecting the LLPs property and copies of charges to be registered.
LLPs are required to register charges with the Registrar of Companies.
A creditor or member of the LLP is allowed to inspect the register without paying
Re LLPs, who is entitled to check the register of charges?
A creditor or member of the LLP is allowed to inspect the register without paying
Re LLPs, what is the position in relation to insolvency?
The company liquidation scheme under IA 1986 applies to LLP and its members
Re LLPs, what claims can be brought against members in relation to insolvency?
o Misfeasance
o Fraudulent trading
o Wrongful trading
What are the advantages of an LLP?
o Members have limited liability for the LLP’s debts
o They can grant fixed and floating charges over their assets (unlike GPs)
o Lots of leeway in terms of management structure and rules
o They can appoint an administrator
What are the disadvantages of an LLP?
- Administrative and accounting requirements
- Filed documents are available for public inspection
- LLPs are subject to clawback provisions on insolvency
what must LLPs have in terms of an email address?
‘appropriate email address’
this is an email address where emails sent by the registrar would be expected to come to the attention of a person acting on behalf of the limited liability partnership.
