The Partnership Agreement Flashcards
Under the Partnership Act 1890, what is the default rule for profit sharing if there is no partnership agreement?
A) Based on capital contribution
B) Equally among partners
C) Based on seniority
D) Based on hours worked
B) Equally among partners
Explanation:
Section 24(1) PA 1890 states that, unless otherwise agreed, all partners share equally in the capital and profits of the business, regardless of their initial contributions.
Which of the following CANNOT be done without a unanimous decision of the partners under PA 1890?
A) Admitting a new partner
B) Changing the profit-sharing ratio
C) Expelling a partner
D) Making an everyday business decision
A) Admitting a new partner
Explanation:
Under Section 24(7) PA 1890, a new partner cannot be admitted without the unanimous agreement of all existing partners. This is an important protection for partners, ensuring they have a say in who joins the business.
What happens if a partner retires and there is no partnership agreement stating otherwise?
A) The partnership automatically dissolves
B) The retiring partner’s share is transferred to the remaining partners
C) The retiring partner remains liable for future debts
D) The remaining partners must buy out the retiring partner
A) The partnership automatically dissolves
Explanation:
Under Section 26 PA 1890, unless agreed otherwise, the departure of a partner dissolves the partnership. This is because the partnership is seen as a collective entity, and its continuity is broken when a partner leaves.
Under PA 1890, what is the default rule on whether a partner can take a salary?
A) They can if they contribute more capital
B) They can if they work full-time
C) No partner is entitled to a salary unless agreed otherwise
D) They can take a salary automatically
C) No partner is entitled to a salary unless agreed otherwise
Explanation:
Under Section 24(6) PA 1890, a partner is not entitled to a salary for their work in the partnership unless it has been expressly agreed in a partnership agreement.
Emma, Liam, and Jack are in a traditional partnership without a written agreement. Emma contributed 60 percent of the capital, Liam 30 percent, and Jack 10 percent. A dispute arises over profit sharing. How will the profits be divided under PA 1890?
A) 60% to Emma, 30% to Liam, 10% to Jack
B) Equally among all three partners
C) Decided by a majority vote
D) Based on hours worked
B) Equally among all three partners
Explanation:
Under Section 24(1) PA 1890, profits are shared equally unless agreed otherwise, even if one partner contributed more capital.
David is a partner in a law firm but wants to start a separate business in the same field. The partnership agreement is silent on competition. Can David do this under PA 1890?
A) Yes, he is free to compete
B) No, unless he gets permission from the other partners
C) Yes, but he must share the profits with the firm
D) No, he must leave the partnership first
B) No, unless he gets permission from the other partners
Explanation:
Section 30 PA 1890 states that a partner cannot compete with the firm while still being a partner unless the other partners consent. If they do not consent, David must account for any profits made from competing.
A partnership agreement states that unanimous consent is required to remove a partner. However, the partners want to expel James due to misconduct. James refuses to leave. What is the best solution?
A) Expel him by a majority vote
B) Dissolve the partnership and reform without James
C) Force him out through legal action
D) Ignore the agreement and remove him anyway
B) Dissolve the partnership and reform without James
Explanation:
Under Section 25 PA 1890, a partner cannot be expelled unless expressly agreed in the partnership agreement. If James refuses to leave, the only option is to dissolve the partnership and create a new one without him.
Alice and Ben are partners. Ben leaves the partnership but does not notify suppliers. Six months later, a supplier provides goods on credit, thinking Ben is still a partner. Who is liable?
A) Only Alice
B) Only Ben
C) Both Alice and Ben
D) Neither, as Ben has left
C) Both Alice and Ben
Explanation:
Under Section 36 PA 1890, if a former partner’s departure is not notified, they can still be liable for future debts because third parties may assume they are still a partner. To avoid liability, actual and constructive notice (e.g., publication in the London Gazette) should be given.
A partnership does not have a written agreement. One partner, Sam, has been making major business decisions alone without consulting the others. The other partners disagree. Can Sam do this under PA 1890?
A) Yes, all partners have equal authority
B) No, all partners must unanimously approve decisions
C) No, decisions must be made by a majority vote
D) Only if the firm is a limited partnership
C) No, decisions must be made by a majority vote
Explanation:
Under Section 24(8) PA 1890, decisions in the ordinary course of business can be made by a majority vote, but major changes (e.g., changing business type) require unanimous consent.
A partnership owes £50,000 to a supplier. There are three partners, but one partner, Tom, has no personal assets. Who is responsible for the debt?
A) The partnership as an entity
B) Only the wealthiest partner
C) All partners equally
D) Only Tom
C) All partners equally
Explanation:
Under Section 9 PA 1890, all partners are jointly liable for contractual debts, meaning each partner can be sued for the full amount. If one cannot pay, the others must cover it.
