Partnerships / LLPs (+ taxation) Flashcards
Describe the key feature of a partnership re. liability.
Partnerships have no legal personality; the partners are personally liable for the debts and obligations of the partnership:
- Tort: joint and severally liable.
- Contract: jointly liable.
Define a partnership
Relationship between 2 or more persons carrying on a business in common with the aim of making a profit
- Can a former partner be liable for debts/obligations?
- Can a new partner be liable for debts/obligations from before he joined the partnership?
- Is a retiring partner liable for debts/creditor agreements when he retires?
- Can a non-partner be liable for debts/obligations?
- Yes, former partners should give ACTUAL notice of their departure to the persons they’ve had dealings with, or CONSTRUCTIVE notice of their departure in London Gazette, to persons they’ve not had dealings with.
- No, the new partner cannot be liable for existing debts/obligations.
- Yes, unless the agreement is novated with the creditor’s consent.
- Yes, if they hold themselves out as a partner (even if implied by words/conduct), the third party gives credit to the partnership (e.g. goods and services), and the third party relies on the person’s representation.
What are indications which could indicate a partnership
Evidence of profit-sharing or agreement to shares the losses equally with the profits.
If all the partners are involved in the decision-making.
What is the sort of duty that partners owe one another in the partnership?
Fiduciary relationship - no conflicts of interests; no unauthorised profits, overriding duty of good faith / full and honest disclosure
Who can bind a partnership? (3 ways)
- Standard law of agency: partners can give actual, express or implied authority and can ratify an agent’s contract.
- Partners can bind the partnership (every partner is an agent of the firm), even if the other partners do not approve, on two conditions: if he acts in the usual way of the business AND on the kind of work carried on by the firm. (NOTE: if the third party believes / knows that the partner does not have authority, he cannot bind).
- Standard law of apparent authority: agents can bind the partnership, e.g. if the firm represents that A is, or if A represents himself as, a member of the partnership. (EG: using a title like “marketing manager” or an outdated firm letterhead).
What are the costs, disclosures, and formalities required to set-up an LLP, and, a partnership?
Partnership - none. It’s based on the two or more peoples’ joint business relationship.
LLP - (1) need to register with Companies House, (2) Certificate of Incorporation, (3) have at least 2 or more people carrying on a law business with a view to profit. Also at least 2 people must be “designated members”.
What is the main difference between an LLP or Partnership?
LLP has separate legal personality.
What are the key provisions of a Partnership Agreement?
Commencement / Duration - without an agreed fixed term, any Partner leaving with dissolve the partnership.
Capital, Profits, Loss - partnerships nearly always designate their own “profit-sharing ratio”.
Salary - without a “Salary” clause, there is no default right for a partner to earn a salary.
Duties, Powers and Restrictions - on the partners, e.g. work input and roles.
Retirement / Expulsion - without this, there is no way to expel partners other than by partnership dissolution.
What decisions in a partnership require MAJORITY consent and which require UNANIMOUS consent?
Majority is used for nearly all decisions, other than the following:
1. Changing the fundamental nature of the business,
2. Introducing a new partner,
3. Varying the rights and duties of the partners.
How are partnerships dissolved?
Automatic dissolution (expiry of a fixed term, if the business has become unlawful court order, bankruptcy of a partner, death of a partner, completion of business venture)
Dissolution by members’ notice (if there is no fixed term)
How are profits collected and distributed when a partnership is dissolved?
Firstly, all partners get paid back their original capital contributions (unless otherwise agreed).
Surplus capital is distributed as per any “asset surplus ratio”. Failing that, the “profit sharing ratio” is used. Failing this, the surplus assets are distributed equally (s.24(1) PA 1890).
Both LLPs and Partnerships are tax transparent. How exactly are they taxed?
Income Tax: Partners are taxed on their share of the INCOME (i.e. profit, not total revenue).
Capital Gains Tax: Partners are taxed as per their fractional share in the asset. This is based on the profit-sharing ratio, or if there is no ratio, the shares are held equally by the partners.
For LLPs:
- Stamp Land Duty Tax: relief granted if the partnership assets are held in an LLP
- VAT: LLP registers for VAT, not the individual partners.
A partnership has been formed by three people who contribute capital of £10,000, £15,000 and £20,000 respectively. No partnership agreement has been entered into. In the first year of trading, the partnership suffered a loss of £9,000. Each partner contributed £3,000 to cover this. The partner who contributed £10,000 in capital consequently decided to leave the partnership.
What is entitlement of the partner in terms of withdrawing their capital on leaving the partnership?
The partner may withdraw the £10,000 originally contributed.
Unequal contribution of capital does not imply displacement of the rule that all partners are entitled to share equally in profits and contribute equally to losses. However, here the partners have contributed capital unequally so there is an implied agreement that they are entitled to withdraw capital unequally. The partner can therefore withdraw their original contribution of £10,000.
