Partnerships and LLPs Flashcards
Definition of partnership
A relationship between persons carrying on a business in common with a view to make a profit. (s1(1) PA 1890)
Need at least two people
Determining the existence of a partnership
- Profit sharing - prima facie evidence, especially if losses are shared as well
- All individuals take part in decision making
- Loan will not make a partnership
- Not being held out as a partner makes existence of partnership less likely
Advantages of using a partnership
- costs nothing to create
- no formalities or filing or disclosure requirements
- high degree of confidentiality
Fiduciary relationship in partnership
Overriding duty of good faith in a partnership.
Duty owed by the partners to one another is similar to that owned by a trustee to a beneficiary.
- Honest and full disclosure
- No unauthorised personal profit
- no conflict of duty or interest
Personal liability for partnership debts
No separate legal personality and liability is unlimited.
Contractual liability: every partner in the firm is liable jointly with the other partners for all the debts and obligations of the firm incurred whilst they are a partner.
Tortious liability: liability is joint and several in tort.
Liability of non-partners
New partners:
- new partner is not automatically liable in relation to any debts incurred before they joined
Former partners:
- a partner is still liable after they retire. May be able to novate the agreement with the consent of the creditor to release them
- May also become liable for partnership debts incurred after they left. A third party can treat all apparent partners as jointly liable to pay any debts unless the third party has been notified of the change by:
- Actual note - for those with actual dealings with the partner before departure
- Constructive notice (publication in the London Gazette) - for those who have not had actual dealing with the partner before departure.
Holding out (non-partner)
A non-partner may be personally liable on a partnership debt if they have held themselves out as a partner (or knowingly allowed themselves to be held out as one).
Elements:
(i) Representation to a third party to the effect that a person is a partner
(ii) the third party’s action in response (giving credit/supplying goods etc)
(iii) the third party’s state of mind (believing the representation)
Contracts binding partnership: content with agent’s acts
If partners are happy for firm to enter into the contract and have given actual, express or implied authority the firm will be bound.
If no authority the partners can ratify the agent’s acts and adopt the contract
Contracts binding partnership: not content with agent’s acts (partner)
- Partner binds firm against others’ wishes
- third party’s view of what is happening that matters
Will bind the firm if:
- the act is for carrying on business of the kind carried on by the firm
- the act is for carrying on such business in the usual way
Not be bound where:
- third party knew that the partner was not authorised to enter into the contract
- third party did not know or believe that the partner was a partner
Note: a partner who binds their firm without actual authority may be liable to the other partners for breach of contract
Contracts binding partnership: not content with agent’s acts (non-partner)
Common law rules of agency apply.
If has apparent authority they may still bind the firm.
Apparent authority: principal represents or permits a representation to be made to a third party that a person has authority to bind the firm.
Once the representation has been made to and relied on by the third party the principal is bound.
Taxation
Each partner is liable to tax as an individual on their share of the income or gains of the partnership. (tax transparency)
HMRC requires a partnership to make a single tax return of its profits.
Partners also submit their own tax returns and are liable to pay income tax and capital gains tax.
Income tax
Each partner is personally liable for the income tax on their share of the partnership profits
Unlike with other partnership liabilities a partner is NOT liable for the tax on other partners’ shares of the partnership profits.
Capital gains tax
Normal capital gains tax principles apply on disposal of a capital asset by a partnership.
Each partner is treated as owning a fractional share of the asset. On disposal by the partnership, each partner is treated as making a disposal of their share and will be taxed on this share of any gain subject to the availability of any reliefs available to individuals.
A partner’s fractional share shall be based upon the agreed profit sharing ration or equally if one is not agreed.
Partnership agreement
Most partnerships will have some form of express written partnership agreement. Will at a minimum cover:
- commencement and duration
- partnership name and place of business
- partnership property
- capital, profits and losses
- drawings/salary
- accounts
- dissolution of the partnership
- duties powers and restrictions (work and roles, decisions making, incoming partners, retirement, expulsions, non compete)
PA: commencement and duration
Useful an agreement to set out a date on which the partners agree that the particular rights an obligations contained in the agreement will commence.
May have a fixed term or may continue in accordance with the agreement
PA: name and place of business
Name must not:
- include ‘limited’ ‘ltd’ etc.
- be offensive
- the same as an existing trademark
- suggest connection to the government without permission
Should also set out the place of business and nature of the business
Partnership property
Each partner is deemed to own a share in the property belonging to the partnership.
Default: all property brought into the partnership in the course of business is partnership property.
All property bought with money belonging to the partnership is deemed to have been bought for the partnership.
Therefore, sensible to agree which assets are partnership property to minimise the potential for dispute later.
Shares in income and capital and profits and losses
Default: Partners are entitled to share equally in the capital and profits of the business and to contribute equally towards the losses of the business. (if contributed capital unequally can withdraw unequally).
Therefore very important there is an express provision setting out a profit sharing ratio.
Drawings/salary
Default: not entitled to salary and entitled to share equally in income profits.
Agreement should set out how much each partner may draw in a given period. It can also provide for a salary in addition to an income profit share.
Work input and roles; limits on authority
Default: every partner may take part in the management of the partnership business (but are not required to).
Agreement should therefore set out requirements for each partner in terms of the work they do for the business.
Should also set out any limits on authority.
Decision making
Default: decisions arising during ordinary course of the business are decided by a majority, except for any change to the nature of the business.
Agreement should deal expressly with decision making and management.
All partnership decisions must be decided majority other than following which require unanimity:
- changes to the nature of the partnership business
- introducing a new partner
- varying the rights and duties of partners
Incoming partners
Default: no person may be introduced without the consent of all existing partners
- usually this is a good idea, but also common to expressly provide for this
Expulsion
Default: a partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this.
- therefore in absence of express prior agreement, impossible to remove a partner without dissolving the partnership.
Partner leaving
Default: where no fixed term has been agreed for the duration of the partnership, it will be dissolved by any partner leaving
Most cases: technical dissolution - a new partnership is formed by the remaining partners who continue the business and does not lead to the winding up of the business.
Although any of the partners can apply to court to have the old partnership wound up.
PA should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave.
Non-compete clause
duty not to compete with the firm
- 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, they must account to the firm for all profits made by them in that business.
Restrictions on outgoing partners
NO default clauses relating to this.
Restrictions can be provided for in a PA:
- non-compete clauses
- non-solicit clauses
- non-dealing clauses
These are only enforceable if they are reasonable in terms of duration, geographical area and scope and are necessary for the protection of a legitimate business interest of the partnership.
Dissolution of partnership
Can be dissolved in a number of ways:
- automatic dissolution (expiry of fixed term, completion of specific venture, death or bankruptcy of any partner)
- dissolution of partnership by notice
- dissolution of partnership if the business becomes unlawful
- dissolution by court (last resort)
Since automatic dissolution is undesirable, it is important to ensure that the partnership agreement deals with when a partnership may be dissolved and the effect of this.
Collecting in a distributing assets on the dissolution of a partnership
Default: (subject to written agreements) 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.
Any surplus is shared according to the Asset Surplus Ratio. If none set, then according to the agreed Profit Share Ratio. If no PSR then share equally.
What is an LLP
A hybrid vehicle. It has elements of both a company and a partnership.
- flexibility of a partnership with the added advantage of limited liability for its members.
- has a legal personality which is separate from its members: liable for its own debts and able to contract with third parties.
Legislation for LLPs
LLPs are incorporated pursuant to the LLPA (limited liability partnership act 2000).
Supplemented by two statutory instruments
Note: insolvency act and company directors disqualification act also apply to LLPs
Formation of an LLP
Two or more personal associated for carrying on a lawful business with a view to profit can incorporate an LLP.
LLP: registration at companies house
Subscribing members fills out a Form LL IN01 which is sent to Companies House with the relevant fee.
Form states:
- name of LLP
- registered office’s address (must be appropriate)
- registered email address
- which members are designated members
Note: person cannot be a member if they are subject to disqualification as a director
LLPs: Certificate of incorporation
- Registrar issues a certificate of incorporation as conclusive evidence all legal requirements have been complied with
LLPs: continuing registration regime
LLPs are obliged to continue to file information with Companies House:
- change of name
- change in registered office and email
- change in membership
- creation of a charge
- annual confirmation statement
- accounts
LLPs; in-house records
- registers of its members and people with significant control
LLPs: members
- An LLP must have at least two formally appointed members at all times - no limit on the maximum number of members
- At least two members of the LLP must be designated members
A member will cease to be a member upon:
- death
- agreement with other members
- giving notice to other members
- dissolution
What are the designated members responsible for?
- signing accounts on behalf of members
- making filings at Companies House
- acting on behalf of the LLP if it is wound up
LLP Agreement
A private document which sets out the formal procedures and arrangements which the members have agreed to be the basis of the operation of their business.
In absence of such an agreement, 2001 Regulations contain eleven default provisions.
LLPs: default provisions
- members share equally in capital and profits
- LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business
- every member may take part in management
- no salary
- no person can become member or assign membership without consent of all existing members
- ordinary decision making may be by the majority of its members. Any proposed change to nature of business requires unanimity
- books and records must be available for inspection by members at registered office
- must give true and full disclosure of things affecting LLP to any member or legal rep
- duty to account if carrying on business of same nature without consent
- every member has a duty to account for benefits derived from LLP and its business or properties
- no implies power of expulsion by majority unless expressly provided for
Taxation of LLP
LLP is not taxed but the partners are.
Same tax principles as partnerships.
