Partnerships and LLPs MCQs Flashcards
Two individuals want to start a business together and are keen to limit their liability. They are both going to be active in the running of the business. They do not want to spend a lot of money in the set up of the business, but they need the ability to raise some finance in the future in the business name.
Which of the following would be the best vehicle for their business?
A public limited company
A private limited company
A limited liability partnership
A partnership
A sole trader
A private limited company
Correct. This option has the ability to raise finance and limit the personal liability of the individuals.
Your client is in the process of setting up an online recruitment business. In the future, it is hoped that staff will be employed to undertake a variety of tasks within the business, but for now, all work is carried out by your client who has secured investment from a family member. It has been agreed verbally that the family member will not be entitled salary and will not have any involvement in the day-to-day running of the business. Your client intends to take a salary from the business, but he has not discussed this with the family investor.
You have advised your client on the choice of business medium for this venture and your client has decided that a partnership would be the best option. Your client is keen to keep legal work and formality to a minimum at this stage and has asked you to explain the implications of continuing without a partnership agreement until the business has a regular turnover.
Which of the following statements best describes the impact of your client accepting the investment and continuing without a partnership agreement?
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would require the consent of both partners.
Both partners would be entitled to equal salaries, equal shares in the profits of the partnership and decisions would require the consent of both partners.
Neither partner would be entitled to any salary, your client would be entitled to all of the profits of the partnership and decisions would be made by your client alone.
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would be made by your client alone.
Both partners would be entitled to equal salaries and equal shares in the profits of the partnership, but decisions would be made by your client alone.
Neither partner would be entitled to any salary, both partners would be entitled to equal shares in the profits of the partnership and decisions would be made by your client alone.
Correct. The Partnership Act 1890 contains a default code, which applies to relations between the partners themselves in the absence of any contrary agreement. Here, there is a contrary agreement which provides that the family member will not be entitled to a salary and will not participate in decisions of the partnership. The default provisions will apply in respect of your client’s salary (no entitlement) and profit share (equal shares).
Two individuals (Partner A and Partner B) began trading together as a partnership five years ago. Two years ago a third partner, (Partner C) joined the partnership.
Partner A put in 75% of the start up capital and partner B put in the remaining 25%. Partner C has never contributed any capital but the partnership uses a warehouse owned by Partner C. The partners have never entered into any formal agreement.
Which of the following statements represents the correct position with regards to the rights to the profits of the partnership and a salary for each partner under the default provisions of the Partnership Act 1890?
The three partners are entitled to an equal share of the profits and a salary in equal proportions to their original capital investment.
The three partners are entitled to an equal share of the profits but none of the Partners are entitled to a salary.
Partner A and Partner B are entitled to an equal share of the profits, but Partner C is not entitled to any profits. All three partners are entitled to an equal salary.
The three partners are entitled to a share of the profits equal to the percentage of their original capital investment and no salary.
Partner A and Partner B are entitled to an equal share of the profits, but Partner C is not entitled to any profits. None of the partners are entitled to a salary.
The three partners are entitled to an equal share of the profits but none of the Partners are entitled to a salary.
Correct. Under the Partnership Act 1890 all partners are entitled to an equal share of the profits, regardless of their original investment and the PA 1890 states that unless it is agreed to the contrary no partner shall take a salary.
You act for a partnership which is made up of 8 partners. There is no written partnership agreement. Profits have always been shared equally between the partners.
Three years ago, the partners all agreed to take out a loan to renovate their main office. The partners all contributed equally to repaying the loan. Unfortunately, the partnership has not been profitable, and they have recently defaulted on the loan repayments.
One of the partners is about to retire. No documentation has been drafted to confirm the details of her retirement. Can the partner who is about to retire be liable for repaying any of the loan?
Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be be jointly and severally liable for repaying the loan regardless of retirement.
No, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, only the current partners will be jointly and severally liable for debts of the partnership.
Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be jointly liable for repaying the loan regardless of retirement.
No, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, only the current partners will be jointly liable for debts of the partnership.
No, because the partners have not entered into a written partnership agreement which deals with liability on retirement therefore once the partner retires, she is no longer a partner and therefore has no liability for any debts of the partnership.
Yes, because there is no written partnership agreement therefore under the default provisions of the Partnership Act 1890, all those persons who were partners at the time that the loan agreement was entered into will be jointly liable for repaying the loan regardless of retirement.
Correct. Under the Partnership Act 1890 every partner is jointly liable for contractual debts and a partner will still be liable even though they have retired.
Client A and client B are looking to start up a new business offering commercial cleaning services locally. The only requirements of the clients are that (i) the profits and capital of the business are split equally between them and (ii) their liability is limited to their investment in the business (the ‘Agreed Terms’). Provided that these requirements are met, the clients want as little formality and documentation as possible.
What type of partnership would be most appropriate for the clients?
A partnership because although it requires a written agreement to operate on the Agreed Terms and is not a separate legal entity, it does offer limited liability.
A partnership because although it is not a separate legal entity, it offers limited liability and does not require a written agreement to operate on the Agreed Terms.
A limited liability partnership because it is a separate legal entity offering limited liability and does not require a written agreement to operate on the Agreed Terms.
A limited liability partnership because although it is not a separate legal entity it does offer limited liability and does not require a written agreement to operate on the Agreed Terms.
A limited liability partnership because although it requires a written agreement to operate on the Agreed Terms, it is a separate legal entity offering limited liability.
A limited liability partnership because it is a separate legal entity offering limited liability and does not require a written agreement to operate on the Agreed Terms.
Correct. Whilst the other answer options might sound plausible, they are each incorrect. A partnership is not a separate legal entity and does not offer limited liability for the partners whereas the opposite is true for a limited liability partnership. Additionally, a partnership agreement is not legally required to set up a partnership or limited liability partnership and would not strictly be needed if the terms agreed matched the statutory default provisions.
Question 1
A client wishes to set up a new business with a friend. She does not know whether she
would like to trade as a partnership, limited liability partnership or company. The business
is a clothing manufacturing business and eventually the client and her friend would like
to attract business from multinational retailers. They want to make their business seem as
professional as possible to attract business from other parts of the world. They will need
to take out substantial loans in the future to expand. They do not envisage anyone joining
them in running the business, but they will be taking on employees.
Which of the following best describes the type of business that the client should set up?
A The client’s best option would be to start a partnership because the process is informal,
there is no obvious reason why the client and her friend would need their liability for
the business’s debts to be limited, and there would be no need for them to grant a
floating charge.
B The client’s best option would be to start a company because the shareholders’ liability
for debts would be limited, they would be able to attract finance because companies
can grant floating charges, and the company is a widely recognised business medium
worldwide.
C The client’s best option would be to start an LLP because the partners’ liability for
debts would be limited, they would be able to attract finance because LLPs can grant
floating charges, and the LLP is a widely recognised business medium worldwide.
D The client’s best option would be to start either an LLP or a partnership because there
will only be two partners and there is no need to start a company and have the burden
of the legal and administrative requirements it brings.
E The client’s best option would be to start a company or an LLP because this will enable
them to run the business in a more organised way, whereas partnerships tend to be
run more informally because no partnership agreement is necessary.
Answer
Option B is correct. In a trading business, having limited liability for the debt of the business
is an advantage because of the risk of paying for materials and then not being paid for
the manufactured goods and being in debt. In a partnership, the liability of the partners is
unlimited. Accordingly, option A does not represent the best advice in the circumstances.
Further, the client wants to attract finance so a company or LLP would be better than a
partnership, because they can grant floating charges. The company has a higher status
than an LLP and is more widely recognised worldwide, which would benefit the client
because she has said they want to attract international business. Accordingly, the option of
starting an LLP set out in options C to E does not represent the best advice to the client.
Question 2
A client wishes to set up a private company limited by shares (ordinary £1 shares only) and,
following advice, wishes to adopt the Model Articles in their entirety.
Which of the following best describes the additional information that should be
requested from the client before completing form IN01?
A The identity, date of birth and address of the proposed company’s first shareholders,
directors and any company secretary, the address of the registered office, the name of
the company and how many shares the first shareholders will have.
B The identity, date of birth and address of the proposed company’s first shareholders,
directors and any company secretary, the address of the registered office, the name of
the company, the number, type and nominal value of the shares and the contents of its
articles of association.
C The identity, date of birth and address of the proposed company’s first shareholders,
directors and any company secretary, the address of the registered office, the name of
the company, the number, type and nominal value of the shares and whether the client
wishes to appoint additional directors once the company is incorporated
D The identity, date of birth and address of the proposed company’s first shareholders,
directors and any company secretary, the address of the registered office, the name of
the company and the contents of its articles of association.
E The identity, date of birth and address of the proposed company’s first shareholders,
directors and any company secretary, the address of the registered office, the name of
the company, any trading name of the company, the number, type and nominal value
of the shares and the contents of its articles of association.
Answer
Option A is correct. All of this information is needed in order to complete form IN01 and
the client has not yet provided it. The client wishes to adopt the Model Articles so they do
not need to be asked about the contents of the proposed company’s articles. Similarly, we
already know the company will have ordinary £1 shares, so we only need to know how many
shares the client wishes the company to have on incorporation. Lastly, the IN01 does not
need the company’s trading name: this is a business decision which can be made following
incorporation, as can the decision to appoint more directors.
Question 1
A man and a woman (‘the partners’) have recently set up a market- stall bakery. The man
contributed more capital. The partners agreed that the man would work 8.00am– 5.00pm
and the woman would work 8.00am–4.00pm, but this was the only aspect of running the
business that they expressly agreed. The business satisfies the definition of a partnership
under the PA 1890.
Which of the following statements best describes how the partners will share the
partnership’s income and capital profits?
A Capital profits will be shared equally but the man may successfully argue that it is an
implied term that income profits will be shared according to how many hours each
partner works for the partnership.
B Capital profits will be shared equally but income profits will be shared according to
how many hours each partner works for the partnership.
C Income and capital profits will be shared according to how many hours each partner
works for the partnership.
D Income and capital profits will be shared according to the partners’ initial capital
contributions.
E Income profits will be shared equally but the man may successfully argue that it is an
implied term that the partners own the capital in accordance with their initial capital
contributions.
Answer
Option E is correct. Section 24(1) of the PA 1890 provides that all capital and income profits
and losses are shared equally, and that it does not depend on the hours the partner
works – so options A, B and C are wrong. However, it has been established by case law
that it can be inferred from a course of conduct that the partners own the capital profits
in unequal shares. Option D is wrong because whilst a court may decide that the partners
should share profits according to their initial capital contributions, this would depend on
whether the relevant partner’s argument was successful rather than it being an established
legal rul
Question 2
A client is leaving a partnership today. The other partners have removed her name from
the letterhead and other documentation and will no longer refer to her as a partner. The
client seeks advice on whether she will remain liable for existing and future debts of the
partnership.
Which of the following best describes the best advice to the client regarding her
liability going forward?
A She will remain liable for existing partnership debts (unless she enters into a novation
agreement with the partnership and its creditors) but will not be liable for future debts
as long as she complies with the notice requirements in s 36 PA 1890.
B Once she has left the partnership, the client will no longer have any liability for any
existing or future debts of the partnership.
C She will remain liable for both existing partnership debts and future partnership debts
unless she enters into a novation agreement with the partnership and its creditors.
D Once she has left the partnership, the client will no longer have any liability for any
existing or future debts of the partnership as long as she complies with the notice
requirements in s 36 PA 1890.
E Now that the client’s name has been removed from the partnership’s letterhead and
related documentation, she will no longer have any liability for any existing or future
debts of the partnership.
Answer
Option A is correct. Partners cannot escape liability to third parties for debts the
partnership entered into while they were a partner unless there is a novation agreement
(s 17 PA 1890). This means that options B, D and E are wrong. The notice requirements in s
36 PA 1890 constitute notice to all existing and future contacts that the partner has left the
firm, and complying with s 36 is sufficient notice that the partner has left the firm so will not
be liable for any debts the partnership enters into after that date (unless there is evidence
of holding out). For this reason, option C is wrong.
Question 3
Two individuals are going into business together as photographers for events such as
weddings and large parties. They do not know which business medium to choose. They
will have professional indemnity insurance and know that they do not want to expand
the business beyond northwest England. They are happy to deal with small amounts
of paperwork and do not mind paying administrative costs associated with running a
business. Their solicitor advises them that a limited liability partnership (‘LLP’) would be a
good option for them.
Which of the following best describes why an LLP would be advisable rather than a
company or general partnership?
A Because in an LLP, there is no paperwork but the partners will benefit from the
advantage of limited liability for the firm’s debts, which is always advisable.
B Because a photography business may face large liabilities, so they must have a
business which benefits from limited liability.
C Because in an LLP, there is no paperwork and while the partners have unlimited
liability for the LLP’s debts, this is not significant here because the partners will have
insurance, and this will cover liability for any of the LLP’s debts.
D Because it combines the advantages of limited liability with small amounts of
paperwork, and because they will not be expanding overseas, they do not need the
advantage of the medium of a company being well- known.
E Because it combines the advantage of the prestige of an LLP with small amounts of
paperwork and limited liability for the LLP’s debts for anyone who is not a designated
member.
Answer
Option D is correct. A photography business’s most likely liability is a claim for professional
negligence (eg photos that are not of the required standard), which will be covered by
insurance (so option B is wrong). However, given that the individuals are happy with small
amounts of paperwork and administrative costs, they might as well operate as an LLP and
take advantage of the benefit of limited liability for the firm’s debts. Companies are better
known overseas but they will not be expanding overseas. Option A is wrong because it
does not represent the best advice to the client: it omits the point about not needing the
advantage of the medium of a company being well- known and in addition it is not true to say
that there is no paperwork for an LLP. Option C is also wrong because it refers to there being
no paperwork in an LLP. Option E is wrong because designated members also have limited
liability for the firm’s debts. In addition, there is no significant prestige attached to an LLP.
Question 25
Three clients decide to go into business together. They each invest equal amounts of capital in the business, and agree to share the profits equally. After two years, the business has made a loss and the clients no longer believe the business is viable.
Have the three clients been working in partnership together?
A. Yes, because they are in business together and intended to make a profit even though they have made a loss.
B. Yes, because they agreed to invest equal amounts of capital in the business.
C. No, because they have not entered into a written partnership agreement.
D. No, because they have not registered themselves as a partnership.
E. No, because they agreed to share profits equally but did not agree how to share losses between them.
A - Yes, because they are in business together and intended to make a profit even though they have made a loss.
Three solicitors set up in partnership six months ago. They shared profits equally and ran their business from an office owned personally by one of the partners which he bought seven months ago. The partner who owned the office has now died. At the date of his death, the partnership business was valued at £900,000 and the office was valued at £700,000.
Which of the following best describes the availability of Business Relief (BR) for Inheritance Tax in respect of the deceased partner’s interest in the partnership business and in the office?
A. The interest in the partnership business and the office will both qualify for BR at a rate of 100%.
B. The interest in the partnership business will qualify for BR at a rate of 100% and the office will qualify for BR at a rate of 50%.
C. The interest in the partnership business will qualify for BR at a rate of 100% and the office will not qualify for BR.
D. The interest in the partnership business will not qualify for BR and the office will qualify for BR at a rate of 50%.
E. Neither the interest in the partnership business nor the office will qualify for BR.
E - Neither the interest in the partnership business nor the office will qualify for BR.
Partner A and Partner B set up a business as a firm of architects three years ago. At the time, Partner B signed a two-year van leasing agreement on behalf of the partnership to rent a van for use by both partners. The leasing agreement ended last year. The partnership failed to pay the final instalment under the leasing agreement.
Two months ago, Partner C joined the partnership. There is no formal partnership agreement.
Which of the following statements represents the correct position with regards to the liability of the partnership for the overdue payment?
Select one alternative:
Partner B is solely liable for the payment.
The partnership is liable for the payment.
Partner A and Partner B are jointly liable for the payment.
All three partners are jointly and severally liable for the payment.
All three partners are jointly liable for the payment.
Partner A and Partner B are jointly liable for the payment.
This is a BLP question. This question concerns the liability of partners under the default provisions of the Partnership Act 1890. In the absence of agreement to the contrary, every partner is jointly liable for contractual debts, but a new partner will not be liable for any debts incurred by the partnership before they joined. Partner A and Partner B only will therefore be jointly liable for the payment.
A person is planning to set up a new company for the running of their business. The person wishes to set up the company as a private company limited by shares with unamended Model Articles. The person will be the only shareholder and director.
Which of the following correctly lists the documentation that the person will need to send to Companies House to incorporate the new company?
Select one alternative:
The application for registration (Form IN01); the Memorandum; and the incorporation fee for Companies House.
The application for registration (Form IN01); a copy of the company’s Articles of Association; and the incorporation fee for Companies House.
The Memorandum; a copy of the company’s Articles of Association; and the incorporation fee for Companies House.
The application for registration (Form IN01); the Memorandum; a copy of the company’s Articles of Association; and the incorporation fee for Companies House.
The application for registration (Form IN01); the Memorandum; the statement of the company’s proposed officers; and the incorporation fee for Companies House.
The application for registration (Form IN01); the Memorandum; and the incorporation fee for Companies House.
This is a BLP question. As the company intends to use unamended Model Articles, it is not necessary to deliver a copy of the articles to Companies House. The required documents are therefore the application for registration (Form IN01); the Memorandum; and the incorporation fee for Companies House.
