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Partnerships and LLPs Flashcards

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1
Q

What formalities are required for a partnership? What is the definition of a partnership?

A

None! So long as there is a relationship between (at least 2) persons carrying on a business in common with a view to making profit

I.e. may be unaware that there is a partnership!

Can be st up without intention!

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2
Q

What 2 criteria must be met for a partnership to exist and is it conclusive?

A
  1. Evidence of profit/loss sharing - prima facie but losses make more likely
  2. All individuals take part in decision-making -

Will be determined on the facts!

If loan of money or not being ‘held out’ as partner = unlikely to be a partnership

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3
Q

What are the advantages to using a partnership?

A
  • No formalities (no cost)
  • No filing/disclosure requirements (confidentiality)
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4
Q

What does each partner owe another in a partnership?

A

Duty of good faith i.e. honest/full disclosure, conflict of duty/interest, no unauthorised profit etc.

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5
Q

What is the nature of each partner’s contractual and tortious liability?

A
  • Contractual = partner liable jointly for all debts/obligations of firm incurred whilst they are partner
  • Tortious = partner liable joint and severally

Personally liable re contracts binding on the firm (no SLP)

Tortious wider-reaching (logically)

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6
Q

Will a new partner be automatically liable for debts incurred by the partnership before they joined? And will a retiring partner still be liable for debts incurred by partnership whilst they were a partner?

A
  • New partner not automatically liable for debts before they joined
  • Retiring partner will continue to be liable
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7
Q

How can a retiring partner be relieved from liability?

A

Partnership can novate agreement with consent of creditor

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8
Q

Why can a former partner become liable for partnership debts incurred after they have left? What is the exception?

A

Because a TP can treat all apparent partners of the firm as jointly liable to pay any new debt incurred by the partnership unless TP has been notified of the change

Apparent partners will still be classed as a partner even though they have left the company

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9
Q

What are the 2 ways a TP can be notified of a change?

To avoid an ‘apparent partner’ being liable

A
  • Actual notice - for those who have had actual dealings with partner before departure; or
  • Constructive notice - publication in Gazette for those who have not had actual dealings
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10
Q

What notice must be given by former (apparent) partner to TP when the TP did not know them to be a partner before they left?

A

None - a former partner will not be liable for debts to any TP who did not know them to be a partner before they left

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11
Q

When will a non-partner (i.e. has never been partner) be personally liable on a partnership debt?

A

If they have held themselves out to be a partner

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12
Q

What 3 elements are required for a non-partner to have held themselves out as a partner?

A
  1. Representation to TP to effect that person is a partner
  2. TP’s action in response (i.e. giving credit to the firm e.g. supplying goods); and
  3. TP’s state of mind (believing in representation)

Remember - establishing liability incurred by the non-partner, not the liability of the firm!

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13
Q

When will a partnership be bound to a contract made by an agent?

A

Where all partners happy to enter into contract and have given actual, express or implied authority

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14
Q

Must the agent who bound the firm - which the other partners are now happy with - be a partner?

A

No - can be a partner or non-partner binding the firm

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15
Q

If agent had no authority to enter contract, but the partners are happy to be bound, will that mean the contract is void?

A

No - partners can ratify agent’s act and adopt contract

Expressly or just by going ahead with it

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16
Q

What will be applied if the partners are not happy with the agent’s act (binding firm was against partners’ wishes) and which one is used when?

I.e. agent has entered into contract they are unhappy with

A
  1. S5 PA 1890 (where agent is a partner)
  2. Common law rules (where agent is not a partner)
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17
Q

Under s5 PA, when will a partner’s unauthorised act bind the firm?

Act must be for two things

A

If viewed objectively:

  • Act is for carrying on business of kind carried by firm; and
  • Act is for carrying on such business in the usual way (i.e. is the kind of contract that partner acting alone would usually make on the firm’s behalf [rather than one expecting all partners to sign individually)
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18
Q

When will an unauthorised act not bind a firm to a contract under s5 PA (in regard to TP’s state of mind)?

A

Either…

  • TP knew partner in question was not authorised; or
  • TP did not know/believe that partner was a partner
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19
Q

Will partners have any recourse re a partner who has bound firm without actual authority?

A

Can be liable for breach of contract

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20
Q

What can be used to protect a TP where the agent who entered into the contract was not a partner and the partners are not happy with the agent’s act?

A

Common law rules of agency

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21
Q

When will the common law rules of agency apply to mean a non-partner has bound the firm against the partners’ wishes?

A

If the agent has apparent authority to enter into a contract

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22
Q

When will ‘apparent authority’ arise and what is the consequence?

A
  • Arises where the principal (firm) makes(/permits to be made) a representation to a TP that a person has authority to bind the firm
  • Once representation made to and relied upon by TP = principal bound by actions of that person

e.g. if a firm employs somebody under the title ‘marketing manager’ that title confers on that person apparent authority to bind the firm on marketing decisions.

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23
Q

What counts as ‘holding out’ a person to be a partner and what is the effect?

A
  • Holding out someone as a partner = representation made that they are a partner (even when they are not)
  • Effect: person held out as partner has apparent authority to bind firm in same way a real partner can

An example of holding out is in relation to an ex-partner, when the firm carries on using old letterhead (including that partner’s name) after they retire.

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24
Q

Summary of when an agent’s unauthorised act will bind the firm

A

Partner (s5 PA) - binding if…

  1. Business of kind carried on by firm
  2. Carried out in usual way (e.g. only one partner has to sign)

Non-partner e.g. old partner (common law rules) - binding if…

  • Non partner has apparent authority because of representation given by firm which third party relies on
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25
Q

How are partnerships taxed?

A

Tax-transparent; the partnership does not pay tax itself (not a distinct legal entity)

  • Partnership makes a single tax return of profits which are agreed with HMRC
  • Partners also submit own individual tax returns containing income from partnerships + savings, dividends, rental income etc.

Do not have to pay NI! Are essentially self-employed

I.e. partnership makes a single tax return to show how much partnership owes, then each partners pays income tax on the share of their profits

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26
Q

What does each partner in a partnership have to pay?

A
  1. Income tax - each partner personally liable for income tax on their share of partnership profits (not liable for the tax on other partners’ share)
  2. Capital gains tax
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27
Q

How is CGT calculcated for a partnership?

A

Normal principles - but each partner treated as owning a fractional share of the asset i.e. on disposal: each partner treated as making disposal of their share and will be taxed on this share of any gain (subject to reliefs)

Fractional share based on agreed profit sharing ratio and if none then in accordance with PA

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28
Q

Is the Partnership Act usually used to regulate relationship between parties and debt liabilitiest etc.?

A

No - is a fall-back - old provisions so partners very likely to want to agree a partnership agreement to govern how partnership should be run

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29
Q

What will a partnership agreement include?

A
  • Commencement and duration
  • Partnership name and place of business
  • Partnership property
  • Capital, profits and losses
  • Drawings/salary
  • Accounts
  • Dissolution of partnership
  • Duties, powers and restrictions on partner (work input, authority, decision-making, incoming partners, retirement, non-compete)
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30
Q

Will a partnership ‘commence’ when it says it does in the partnership agreement even if the partners have worked together before this date?

A

No - if partners work together pre-commencement date the default provisions of the Partnership Agreement will apply until then (when criteria satisfied)

31
Q

What happens if partners continue business after expiration of the partnership according to the terms of the partnership agreement?

Can have fixed terms or continue until termination in accordance with provisions

A

The same terms as before will apply

32
Q

As the partnership does not own property itself (no SLP), how is partnership property owned?

A

Each partner has a share in property belonging to partnership; no individual partner has a right to any particular asset

33
Q

If there is no partnership agreement/partnership agreement does not cover it, on what 2 occasions will property be partnership property?

A

Partnership property is:

  1. Property brought into partnership on account of firm for purposes and in course of business
  2. Property bought with money of firm deemed to have been bought on account of partnership (unless contrary intention shown)
34
Q

If there is no partnership agreement/partnership agreement does not cover it, how will shares in income/profits and losses be determined?

A

Partners are entitled to share equally in capital/profits/losses subject to any express/implied agreement

Should avoid by drafting profit sharing ratio (PSR)

35
Q

Will an unequal contribution of capital create an implied agreement as to the sharing of profits/losses?

A

Maybe! But not decisive; can be unequal and still share equally

36
Q

If there is no partnership agreement/partnership agreement does not cover it, what is each partner’s entitlement to remuneration?

A

No entitlement to a salary (only entitled to share equally in profits)

37
Q

If there is no partnership agreement/partnership agreement does not cover it, what is the position on management?

A

Every partner may take part in management (but not required; i.e. do not need to devote all time/attention to business)

Should clearly define roles and limits of authority of partners

38
Q

If there is no partnership agreement/partnership agreement does not cover it, how are ordinary and serious decisions made?

A
  • Ordinary course of business decisions = decided by majority
  • Serious decisiosn (changes to nature of business, introduction of partner) = require unanimity
39
Q

If there is no partnership agreement/partnership agreement does not cover it, how is it decided how new partners are allowed?

A

Unanimous consent is needed for a new partner to join

40
Q

If there is no partnership agreement/partnership agreement does not cover it, how is it decided how a partner is expelled?

A

Cannot be unless previously expressly agreed that a majority can do this (i.e. impossible to expel a partner without an agreement!)

No agreement = cannot expel without dissolving partnership

41
Q

If there is no partnership agreement/partnership agreement does not cover it, what is the effect of a partner leaving (or joining)?

A

The partnership is dissolved (as the continuity is broken when change of identity of individuals that constitute it)

42
Q

What happens upon a ‘technical dissolution’ and why is it problematic?

A
  • A new partnership is formed by remaining partners who continue business
  • Problematic: old partners can apply to court to have old partnership wound up (sale and distribution of assets!)
43
Q

What should a partnership agreement do to prevent dissolution upon a parnter leaving?

A
  • State explicitly that partnership will continue when a partner leaves
  • Include mechanism for remaining partners to buy out departing partner’s share
44
Q

What happens if no express non-compete clause is included?

A

It will be implied - so if a partner carries on business of same nature without consent of other partners, they must account to firm for all profits made

45
Q

What are restraint of trade clauses, which should be included in a partnership agreement, and what is the only time they are enforceable?

A
  • Limitations on powers of outgoing partners to compete with partnership after leaving
  • Should include: non-compete, non-solicit (with clients) and non-dealing (contracts with [former] clients or employees)
  • Only enforceable if reasonable in duration, geographical area and scope
46
Q

What are the 4 ways in which a partnership can be dissolved/terminated?

A
  1. Automatic dissolution
  2. Dissolution of partnership by notice of any partner (where no fixed duration)
  3. Dissolution of partnership if business becomes unlawful
  4. Dissolution by the court as a last resort
47
Q

When will automatic dissolution occur? Is this desirable?

A

Subject to contrary agreement…

  1. Expiry of fixed term
  2. Completion of specific venture
  3. Death or bankruptcy of any partner

Automatic dissolution is undesirable - should include in partnership agreement re when partnership may be dissolved and effect

48
Q

What can partners do once the partnership dissolves?

A

Demand that assets of the business are realised

49
Q

When a partnership is dissolved, what is distributed first?

A

The original capital of each partner

50
Q

If there is no agreement on how surplus assets are shared out following dissolution (an ASR = asset surplus ratio) what happens to surplus assets?

A
  • Will be shared in accordance with the profit share ratio (PSR)
  • If no PSR = shared equally
51
Q

What are the key characteristics of a LLP?

A
  • Flexibility of a partnership (no structure like a company)
  • Limited liability for its members
  • Legal personality
  • Tax transparent
52
Q

What are the commercial uses for LLPs?

A
  • Professional partnerships (solicitors, accountants)
  • Property developers in one-off JV development projects
  • Flexible business vehicle for JVs and VC investments
53
Q

Who can incorporate an LLP?

A

Two or more persons associated for carrying on lawful business with a view to profit

  • Person = individual or company
  • Business = not for no-profits
54
Q

What form must be sent to CH to set up LLP and what must it contain?

A
  • Form LL IN01 (+ fee)
  • State name of LLP, reg office, 2 members, PSC, compliance statement

Can incorporate through electronic software filing or paper filing (same day available for both methods)

55
Q

What will Registrar issue once legal requirements have been complied with?

A

Certificate of incorporation - name of LLP entered on index of company names and given number

56
Q

What must LLPs continue to file with CH once registered?

A
  • Change of name, reg office and membership
  • Creation of a charge
  • Annual confirmation statement
  • Annual accounts
  • In-house records (reg of members and PSCs)
57
Q

What in-house records must an LLP maintain?

A

Register of its members and its PSCs (>25%)

58
Q

Who are the ‘members’ of an LLP? What is the distinction between members and management board?

A

Those who subscribed to the incorporation document and those who became members at later date by agreement with existing members

Can be corporate bodies

No distinction between members and management board (unlike a comapny where directors and shareholders have distinct roles)

59
Q

How many members of an LLP must there be at all times and when will they cease to be a member?

A
  • 2
  • Will cease to be a member on death, agreement with other members, giving notice, or dissolution (if member is body corporate)
60
Q

How many designated members must there be and what are their obligations?

A
  • Must be 2 designated members
  • Obligations: signing accounts on behalf of members, making filings at CH and acting on behalf of LLP if wound up
61
Q

What conditions must be met for an individual to be classified as a ‘salaried member’ of an LLP?

A

The individual’s contribution to LLP is less than 25% of expected disguised salary payable by the LLP

62
Q

What is the LLP equivalent to a company’s Articles of Association?

A

There is not - there is complete flexibility in terms of management

63
Q

Even though there is no such thing as LLP Articles, what should one have in practice and what happens if it does not?

A
  • LLP/Members’ Agreement stating how issues are to be dealt with by LLP and its members (similar to partnership agreement)
  • In absence = 11 default provisions in the 2001 Regulations
64
Q

What are the 11 regulations?

A
  1. Members share equally in capital and profits
  2. 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
  3. Every member may take part in management
  4. No member is entitled to remuneration for managing the LLP
  5. No person can become a member or assign their membership without the consent of all existing members
  6. Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the business requires the consent of all the members
  7. The books and records of the LLP must be available for inspection by the members at the registered office
  8. Each member must give true accounts and full information of all things affecting the LLP to any member or his legal representative
  9. 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
  10. Every member has a duty to account for benefits derived from transactions with the LLP and its business or property
  11. 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).
65
Q

Will gaps not filled by the 11 default provisions be filled by partnership law?

A

No! PA disapplied for LLPs

66
Q

If someone leaves the LLP, will it dissolve as would a partnrship?

A

No - LLP continues

67
Q

What happens if there are only 2 LLP members and one leaves?

A

6 month period where LLP can have one designated member before the sole member becomes joint and severally liable with LLP for any debts incurred after those 6 months

68
Q

How is an LLP taxed?

A

Same way as a partnership; LLP not taxed but partners are

Cf company - pays corporation tax on own income profit and gains

I.e. If two individuals set up an LLP, each will be taxed as an individual i.e. liable to income tax or capital gains tax on their share of the income or gains of the LLP

69
Q

For CGT purposes, how are assets held by LLP treated as being held?

A

Treated as being held by members as partners

I.e. a disposal of an LLP asset, such as land, will be regarded by HMRC as a disposal by the members of the LLP while it is trading.

70
Q

Where a partnership is incorporated as an LLP and assets are transferred to it, what will it benefit from?

A

Relief from stamp duty

71
Q

Can members be employees of the LLP?

A

Case law says no

72
Q

What characteristics does an LLP share with a company?

A
  • Separate legal personality
  • LL for members
  • File accounts on same basis
  • Can create floating charge over assets of LLP
  • Insolvency law applies
73
Q

What characteristics does an LLP share with a partnership?

A
  • No share capital/capital maintenance requirements
  • No distinction between members and management board
  • Members can agree amongst themselves on how to share profits and management duties
  • Membership Agreement is like a Partnership Agreement (if there is one)
  • Tax transparent in the same way

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