Partnerships & Partnership agreements

Question 1

What legislation governs the law regarding partnerships?

Answer 1

The Partnership Act 1890

Question 2

Which 4 areas does the PA 1890 cover?

Answer 2

1. The nature of partnership (what is a partnership)
2. Relations with 3rd parties
3. Relations of partners to one another (This is the declaratory part)
4. Dissolution

Question 3

What is the formation of a firm?

Answer 3

The formation of a firm is the relationship created between the two partners. This can be oral or written.

The formation of a a firm can be really informal although a written PA is recommended, as it can set out in clear terms all that is agreed between the partners .

Question 4

What are the formalities regarding the formation of a firm?

Answer 4

• No registration needed : It’s a matter of fact whether a partnership subsists or not.
• Must notify HMRC : Partners must notify HMRC that they’re in a partnership and must submit partnership accounts to HMRC
• ** Register for VAT if turnover exceeds £85,000 **
• keep partnership accounts for tax purposes
• ** No Maximum number of partners **
• No minimum age to become a partner - You can enter into a contract with a person under 16 however people may be unwilling to contract as person may not have capacity to contract.

Question 5

What does partnerships being “at will” mean?

Answer 5

This means a partnership will carry on as long as all or some of the partners want to carry on with it subject to exceptions stated in s26, s32(c) & s33 of PA 1890

Question 6

What is the s26 exception in relation to partnerships?

Answer 6

Where no fix term has been agreed upon for the duration of the partnership. Any partner may determine the partnership at any time. On giving notice of his intention to do so to all other partners.

(Even if business is going well, if one partner wants to leave and dissolve the partnership, there’s nothing that others can do, UNLESS s26 has been overturned)

Question 7

What is the s32(c) exception in relation to partners?

Answer 7

Subject to any agreement between the partners, a partnership is dissolved if entered into for an undefined time. By one partner giving notice to others of his intention to dissolve the partnership.

(Can also be overturned by PA)

Question 8

What is the S33 exception in relation to partnerships ?

Answer 8

Subject to any agreement between partners, every partnership is dissolved as regards to all the partners by the death or bankruptcy of any partner.

(can be overturned by PA)

Question 9

What does S19 of the PA say in relation to the relationship between partners?

Answer 9

S19 - The mutual rights and duties of the partners can be varied by consent of all partners expressly or inferred from a course of dealings. (In larger firm May want to change from “consent of all” to “consent of majority”.)

• Meaning the actual relationship between partners is a matter of agreement between themselves. It’s better to set them out in a PA, and the terms should suit the needs of the business .

Question 10

What are the implied terms between partners in regards to finances?

Answer 10

S24(1) All partners are entitled to share equally in the capital and profits of the business & must contribute equally towards losses. Whether of capital or sustained by firm.

• This outlines how partners should share equally in 1. profits, 2. capital , 3 . Losses.

This is unless there is an express or implied term to the contrary.

Question 11

What does s44 of PA 1890 say in regards to the sharing of profit’s & losses?

Answer 11

• If there is an express or implied agreement to share profits unequally, losses will also be shared unequally.

Question 12

What are the two main sources of finance within a partnership?

Answer 12

1: Capital - There will be capital the partners contribute into the business.

2 : Borrowing - From lenders.It may be that partners borrow from as bank or from themselves, but not in their relationship as a partner.

( Need to distinguish between “lenders” and “partners” (Capital) important in terms of liability)

Question 13

What are the other implied terms covered in s24 of the PA 1890

Answer 13

• s24(4) No interest paid on capital
• s24(6) Not entitled to remuneration (salary) for acting in partnership business.

All of these are applied unless there is an express or implied agreement to the contrary.

Question 14

What powers could you expect a partner in a business to have?

Answer 14

• Buy and sell good
• Recruit staff / engage professionals
• Receive/ make payments on behalf of firm
• Issue cheques

(This all depends on the type of business)

Question 15

Under what circumstances can a partnership arise?

Answer 15

A partnership can arise under an oral agreement or by an implied course of dealing.

The implied terms of the 1890 act would come into play unless they can say that there is a course of dealing that they don’t come into play.

Question 16

What is a deed in relation to partnerships?

Answer 16

A form of written partnership agreement.
A deed is a solemn form rather than written underhand which is a contractual form.
A deed is a solemn witness statement and is how most partnerships will be executed.
A deed governs the internal relationship between partners to one another and the scope of their powers.

Question 17

Khan v Miah [2000]

Answer 17

House of Lords held a partnership had commenced despite relationship breaking down before the restaurant had opened.

(showed how partnership is defined by the PA 1890 definition & not any agreements to the contrary between partners)

Question 18

What are the fundamental characteristics of a partnership?

Answer 18

• The right to be involved in decision making what affects the business
• share in the profits of the business
• To examine the accounts of the business
• right to insist on openness and honestly from fellow partners
• right to veto introduction of a new partner
• Responsibility for sharing any losses made by the business

(Any or all of these characteristics may be varied or excludes depending on nature of agreement)