Partnerships Flashcards
Partnership - definition
a relationship between persons carrying on a business in common with a view to making a profit
How many people is needed to form a partnership?
2
Is intention necessary to create a partnership?
NO
Evidences of partnership existing
- Evidence of profit and losses sharing
-All individuals take part in decision-making - NOTE: A loan of money by one party to another does NOT create a partnership
Are formalities required and does not cost anything to form a partnership?
No formalities, and costs
What is partner’s liability for partnership debts?
Because a partnership has no separate legal personality from the partners, the partners are personally liable in relation to contracts which are binding on the firm
Contractual liability of partners
joint
Tortious liability of partners
Joint and several
Can a former partner be liable in respect of debts incurred after they left?
It is also possible for a former partner to become liable for partnership debts incurred after they have left -> unless the third party has been notified of this change by
Actual notice - for those who have had actual dealings with the partner before departure
Constructive notice - by virtue of publication of the departure in the London Gazette; -for those who have not had actual dealings with the partner before departure.
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.
Can a non-partner be liable for partnership debts?
If so, when?
Yes, if they held themselves out as a partner
Elements
- Representation to a 3rd party that a person is a partner
- The 3rd party’s action in response (eg. giving credit to the firm)
-3rd party believes/has faith in the representation
If this is established, the non-partner is liable and NOT the firm
Can partners bind the firm against other partners wishes?
Yes if:
The act is for carrying on business of the king carried on by the firm
The act is for carrying on such a business in the usual way
No if:
the third party actually knew that the partner in question was not authorised to enter into the contract on behalf of the firm; or
the third party did not know or believe that the partner was a partner.
How are partnerships taxed?
Tax transparency
Each partner is liable to tax as an individual on their share of the income or gains of the partnership
The partnership itself is not liable to pay tax.
Partners in a partnership are liable to pay both income tax and capital gains tax
Is it necessary to have a partnership agreement?
NO (if you don’t have one PA 1890 provides a framework)
How is partnership property shared in a partnership?
each partner is deemed to own a share in the property belonging to the partnership
all property brought into the partnership whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property
How are income and capital profits shared in a partnership?
all partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses of the business
This is the case even where the parties have contributed to the capital unequally
Are partners entitled to salary?
NO (unless their agreement provides for it)
All partnership decisions are decided by majority or unanimity?
All partnership decisions must be decided by a majority, other than the following which require unanimity:
Changes to the nature of the partnership business
Introducing a new partner
Varying the rights and duties of partners
Expulsion of a parter
What happens when any partner leaves?
Partnership dissolves
Distribution of assets of partnership on winding up
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
Surplus assets shared in accordance with profit share ratio and if not then equally
Company features vs partnership features of LLPs
Corporate Characteristics:
Separate legal personality;
Limited liability for members, subject to the restrictions mentioned;
LLPs have to file accounts at Companies House on much the same basis as companies, leading to a loss of financial privacy (which is one of the main attractions of using a partnership structure);
LLPs, like companies, are capable of creating a floating charge over the assets of the LLP, unlike a partnership
Partnership characteristics
LLPs have no share capital or capital maintenance requirements;
No real distinction between members and the management board (unlike a company, in which the members/shareholders and board of directors have very distinct roles);
Members can agree amongst themselves how to share profits, management duties, how decisions are to be made, how new members are to be appointed and what retirement provisions shall apply;
The Members’ Agreement (if there is one) is like a private partnership agreement;
LLPs are tax transparent in the same way as a partnership
LLP - definition
two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP (natural or legal person)
Do you need to register an LLP?
YES
What do you need to register an LLP at Companies House?
LL IN01 form and fee
LLPs need to continue to file once registered
change of name,
change of registered office, and e-mail,
changes in membership,
creation of a charge,
annual confirmation statement, and
accounts
How many formally appointed members must an LLP have at all times?
2
Does an LLP need agreement?
NO (then default provisions apply)
Taxation of LLPs
Treated like a partnership for tax purposes - LLP is not taxed, but the partners are
each partner will be taxed as an individual, ie liable to income tax or capital gains
