Partnerships

Question 1

What formalities are required to establish a traditional partnership?

Answer 1

None - it is simply a relationship between persons carrying on a business in common with a view to making a profit.

Question 2

Is a partnership a separate legal entity?

Answer 2

No. It is not a separate legal entity from the partners themselves

Question 3

How can you determine the existence of a partnership?

Answer 3

evidence of profit sharing, all individuals take part in decision making.

Question 4

What is the fiduciary relationship of partners to one another?

Answer 4

There is an overriding duty of good faith. PA 1890 contains equitable principles on honest and full disclosure; unauthorised personal profit, and conflicts of duty and interest.

Question 5

Contractual liability of partners?

Answer 5

Every partner in a firm is liable jointly with the other partners for all of the debts and obligations.

Question 6

Liability of new partners?

Answer 6

s17(1) : new partners will not automatically liable in relation to debts incurred by partnership before they joined.

Question 7

Liability of former partners?

Answer 7

They will still be liable for debts incurred by the partnership whilst they were a partner (s17(2)).

A partnership may novate the relevant agreement with the consent of the creditor to remove a former partner’s liability (17(3)).

If a partner leaves, a third party can treat all apparent partners as jointly liable to pay any new debt unless they have been notified by actual or constructive notice that the partner had left.

Question 8

Can someone who ‘holds themselves out’ as a partner be liable for partnership debts?

Answer 8

Yes, if:

• A representation has been made to a third party to the effect that a person is a partner.
• The third party does an action in response.
• The third party had faith in the representation.

Question 9

Is the partnership bound by a contract which an individual has purported to make on its behalf?

Answer 9

If the partners are content with the agents act: IF actual, express, or implied authority has been given, the firm will be bound.

If the partners are not content with the agents act and the agent is a PARTNER: Will bind the firm if it is carrying on business of the kind carried on by the firm, and in the usual way. It will not be bound if the third party actually knew the partner wasn’t authorised, or didn’t know the partner was a partner. s5 PA 1890.

If a non-partner binds the firm against the partner’s wishes: Ostensible authority will apply - if the partnership has held someone out as a partner to a third party this can bind the partnership.

Question 10

How are partnerships viewed for tax purposes?

Answer 10

Each partner is liable to tax as an individual on their share of the income or gains of the partnership. This is ‘tax transparency’.

HMRC requires partnerships to make a single tax return of its profits which must be agreed with HMRC.

Also submit their own individual tax returns.

Question 11

How does income tax work with partnerships?

Answer 11

Each partner is personally liable for the income tax on their share of the partnership profits.

Not liable for the tasx on other partners’ shares of partnership profits.

Question 12

How does capital gains tax work with partnerships?

Answer 12

Normal capital gains tax principles apply on disposal of a capital asset by a partnership.Each partner is treated as making a disposal of their share and will be taxed on this share of any gain.

Question 13

How can the partners mutual rights and obligations be varied?

Answer 13

By their unanimous consent (express or inferred from a course of dealing).

Question 14

Partnership common provisions: Commencement and Duration.

Answer 14

A partnership will commence when s 1(1)Pa is satisfied, but it is helpful to set out a date on which the partners agree particular rights and obligations will commence.

Question 15

Partnership name rules?

Answer 15

Can’t contain limited, Ltd, LLP, plc, be offensive or the same as an existing trademark, or imply a connection with a government without permission.

Question 16

What does PA say about partnership property?

Answer 16

All property brought into the partnership is partnership property. Each partner is deemed to have a share in the property. Partners do not have rights to individual particular assets.

Question 17

PA on drawings and salary?

Answer 17

Partners own the business and may take drawings of income profits. All entitled to share equally in income profits.

No default entitlement to salary - set this out in the agreement.

Question 18

PA on decision making?

Answer 18

All partnership decisions must be decided by a majority, except for changes to the nature of the business, introducing a new partner, and varying rights and duties, which require unanimity.

Question 19

PA on expulsion?

Answer 19

A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this. In absence of other agreement, requires unanimity (including partner to be expelled).

Question 20

Effect of a partner leaving in PA?

Answer 20

Partnership dissolved. PA should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave.

Question 21

Are there default provisions/restrictions on outgoing partners?

Answer 21

No, but often non-compete, non-solicit, non-dealing clauses are inserted into the agreement.

Question 22

How can a partnership be dissolved?

Answer 22

Automatic dissolution (expiry of fixed term, completion of specific venture, death or bankruptcy of any partner).

Dissolution by notice from any partner.

Partnership business becomes unlawful.

Dissolution by the court as a last resort.

Question 23

How does collecting in and distributing assets work on the dissolution of a partnership?

Answer 23

Subject to any written partnership agreement, where a partnership is wound up, once all debts and liabilities have been paid, any money/assets left will be distributed so that each partner is paid back their original capital first (s 44(b)(3) PA 1890).

Question 24

Do LLPs have separate legal personalities?

Answer 24

Yes

Question 25

How are LLPs formed?

Answer 25

Two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP. Person can be company or individual.

The subscribing members register at companies house.

Question 26

What are the LLP registration requirements?

Answer 26

Fill out Form LLIN01, send to companies house with Fee.

Must say the name of LLP, address, email address, who are to be designated members.

Then once registered, they receive a certificate of incorporation.

Question 27

What are the registration obligations on LLP once registered?

Answer 27

Obliged to continue to file information with CH about:
- Change of name
-Change of address and email.
Change in membership
Creation of a charge.
Annual confirmation statement
Accounts.

Also must keep in house records including members and PSCS.

Question 28

What is a members agreement?

Answer 28

A private document which sets out formal procedures and arrangements for which the LLP members have agreed to be the basis of operation. In absence, the 2001 regulations contain 11 default provisions.

Question 29

What are the 11 default provisions for LLPs under the 2001 Regulations?

Answer 29

Members share equally in capital and profits (Reg 7(1));

• An LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP (Reg 7(2));
• Every member may take part in management (Reg 7(3));
• No member is entitled to remuneration for managing the LLP (Reg 7(4));
• No person can become a member or assign their membership without the consent of all existing members (Reg 7(5));
• Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the LLP’s business requires the consent of all the members (Reg 7(6));
• The books and records of the LLP must be available for inspection by the members at the registered office (Reg 7(7));
• Each member must give true accounts and full information of all things affecting the LLP to any member or his legal representative (Reg 7(8));
• If a member (without consent) carries on any business of the same nature as, and competing with, the LLP then they must account for and pay over to the LLP all profits made by them in the business (Reg 7(9));
• Every member has a duty to account for benefits derived from transactions with the LLP and its business or property (Reg 7(10));
• There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a members’ agreement (Reg 8).

Question 30

How are LLPs treated for tax purposes?

Answer 30

Treated as a partnership. Each member taxed as an individual on their share of the profits.