Sole Traders and Partnerships

Question 1

What is a sole trader?

Answer 1

They are a single person. They individually own the business. They contribute the capital. The profits and losses are theirs. They are at one with the business in the eyes of the law.

Question 2

What are the advantages of being a sole trader?

Answer 2

The profits are yours. There is no formal procedure to set it up. You can be independent. You don’t have to disclose information about the business to anyone but the tax authority.

Question 3

What are the disadvantages of being a sole trader?

Answer 3

The risk is all yours. Your are the only one who can put in capital. The entire business is dependent on you personally - if something happens to you there is no business. It is dependent on your own skills.

Question 4

What are the types of ordinary partnership?

Answer 4

General, Limited and Limited Liability.

Question 5

What is a general partnership?

Answer 5

All partners are liable. You are governed by the Partnership Act 1890.

Question 6

What is a limited partnership?

Answer 6

Quite rare now. 2 types of partner, one will have unlimited liability and the other(s) will have limited. The liability of the ltd partners is capped at what they put in. The unltd partners are the ones who run it.

Question 7

What is a Limited Liability Partnership?

Answer 7

They must be registered. All partners have unlimited liability. All partners can be involved in the running.

Question 8

What must there be for a partnership to exist in ‘business’?

Answer 8

Any trade/occupation/profession. Could be a single transaction. Must be a joint business activity - sharing revenue is not enough. Must be at least two people if one dies then it becomes a sole trader (not llp’s).

Question 9

When does the partnership begin?

Answer 9

The day a bank account is opened.

Question 10

What is a partnership agreement?

Answer 10

Agreement as to how the partnership will exist and each partner will contribute. Don’t have to make your own can just use those of the PA 1890.

Question 11

What happens if there is no official agreement, and two people simply set up business together?

Answer 11

It becomes a general partnership.

Question 12

What does the PA 1890 say about P and L?

Answer 12

They are shared equally.

Question 13

What does the PA 1890 say about management?

Answer 13

All partners are entitled to take part in management and decisions can be made by the majority.

Question 14

What does the PA 1890 say about remuneration?

Answer 14

Not allowed for carrying out partnership business.

Question 15

How much interest can be paid on original capital under the PA 1890?

Answer 15

5% on further advances but otherwise none on the original capital.

Question 16

How can a partner be expelled/admitted?

Answer 16

Majority of partners vote in favour of expulsion. All partners in favour of admittance.

Question 17

According to the PA 1890 where should the records be kept?

Answer 17

In the place of business with free access for all partners.

Question 18

Do partners have to follow the PA 1890?

Answer 18

No, any terms that they make for themselves they are allowed to follow ahead of the PA. So any self written partnership agreement takes precedent.

Question 19

What does the fiduciary duty mean for partners?

Answer 19

They all act as agents of the partnership. They are required act in good faith. They cannot keep profits made by the partnership without the consent of other partners. They cannot get in to situations that would be classed as a conflict of interest.

Question 20

How do partnerships end?

Answer 20

Death of a partner. Expiry of fixed term (pre-agreed that the partnership would end after x years). Completion of joint venture. Continuing would be illegal. Partner giving notice for dissolution. Order of the court. All according to PA 1890.

Question 21

When can the court bring a partnership to an end?

Answer 21

Mental disorder. Permanent incapacity. Breach of PA. Business is not a going concern. It is just and equitable to do so. A or both partners have engaged in activity prejudicial to the business.

Question 22

What does S5 of the PA1890 say?

Answer 22

All partners are agents of the firm hence all partners have the power to bind all other partners in any transaction they enter in to. They have this power in any usual transaction that matches the normal powers of partners.

Question 23

What do partners have the implied authority to do?

Answer 23

Borrow money on behalf of the business. Anything that is usual for that type of business.

Question 24

When will the other partners not be bound by the actions of one partner?

Answer 24

When they don’t actually have the authority. When the third party knows they don’t have the authority or does not believe them to be a partner with the authority.

Question 25

What is joint vs several liability?

Answer 25

As all partners can be liable it is the choice made by someone taking legal action to take it against either the one partner or all of them. Even if several liability occurs the other partners are required to contribute to what that partner pays out.

Question 26

What happens when partners retire?

Answer 26

They can only be liable for debts that were incurred before the date of their resignation. The remaining/incoming partners may indemnify that outgoing partner against any debts that are incurred before the retirement - reduces their liability to nothing.

Question 27

What happens when there is a change of partners?

Answer 27

If all partners change then the arrangements of the third party remain with these old partners until they are told about the change. The third party may then agree a novation which swaps liability over from the old partner to the continuing or new one.

Question 28

What is an LLP?

Answer 28

An incorporated partnership where the members and the company exist as two separate entities. Still less requirements than a full on incorporated limited company.

Question 29

How are LLP’s formed?

Answer 29

They produce a doc that states they are an LLP with a reg office, a list of members noting which ones will be designated (in charge of admin and filing duties).

Question 30

Which Act governs LLP’s?

Answer 30

The Limited Liability Partnership Act 2000. Allows any number of partners. Says accounts must be filed annually. Says that it must be registered and compliant with the act and a solicitor has to confirm.

Question 31

What is the LLP equivalent of the PA 1890?

Answer 31

The LLP Regulations 2001 - act if there is no partnership agreement. If a LLP is not registered and a certificate not given then it will be just a general partnership.

Question 32

How do you cease being a member of an LLP?

Answer 32

You tell the other members and then within 14 days you have to tell the registrar at companies house.

Question 33

What is done when an LLP becomes insolvent?

Answer 33

The LLP is either put in to administration or voluntary/compulsory liquidation. Members might be liable to contribute to assets if the PA says as such.

Question 34

What happens to partners withdrawals if an LLP becomes insolvent?

Answer 34

They may be recalled if they are from the last two years and the member knew that they would become insolvent.