Traditional Partnerships Flashcards
Which legislation governs traditional partnerships in England and Wales?
A. Companies Act 2006
B. Limited Liability Partnerships Act 2000
C. Partnership Act 1890
D. Insolvency Act 1986
C. Partnership Act 1890
Explanation: The Partnership Act 1890 governs traditional partnerships. It sets out key rules, such as how partnerships are formed, the liabilities of partners, and the relationship between partners and third parties.
Which of the following is NOT a characteristic of a traditional partnership?
A. Separate legal personality
B. Unlimited liability for partners
C. Joint and several liability in tort
D. No legal formalities required for formation
A. Separate legal personality
Explanation: A traditional partnership does not have a separate legal personality from its partners. This means that partners are personally responsible for the partnership’s debts and obligations.
What is the minimum number of partners required to form a partnership under the Partnership Act 1890?
A. One
B. Two
C. Three
D. Four
B. Two
Explanation: Under section 1(1) of the Partnership Act 1890, a partnership is formed when two or more persons carry on a business in common with a view to making a profit.
Which of the following factors is most likely to indicate the existence of a partnership?
A. A written partnership agreement
B. An equal division of profits and losses
C. The use of a business name
D. Registration with Companies House
B. An equal division of profits and losses
Explanation: Sharing profits and losses is strong evidence of a partnership under section 2(3) of the Partnership Act 1890. However, it is not conclusive—other factors such as joint decision-making are also relevant.
What is the liability of new partners for partnership debts incurred before they joined?
A. Fully liable for all debts
B. Not liable for any past debts
C. Liable for a portion based on their profit-sharing ratio
D. Only liable if they sign a personal guarantee
B. Not liable for any past debts
Explanation: Under section 17(1) of the Partnership Act 1890, a new partner is not automatically liable for debts incurred before they joined unless they agree otherwise.
Adam, Ben, and Carla operate a business together without a formal agreement. They share profits and all participate in decision-making. A supplier sues them for unpaid invoices. Who is liable?
A. Only Adam as he placed the orders
B. Only Carla as she manages finances
C. All three jointly and severally
D. No one, as there is no formal agreement
C. All three jointly and severally
Explanation: Under section 9 of the Partnership Act 1890, partners are jointly liable for contracts entered into by the partnership. Even without a formal agreement, a partnership exists because they are carrying on a business together with a view to profit.
Dylan decides to retire from his partnership but forgets to notify the firm’s suppliers. The firm continues using letterheads with his name. A supplier enters a contract assuming Dylan is still a partner. Is Dylan liable?
A. No, because he retired
B. Yes, under the rule of ‘holding out’
C. Only if the other partners agree
D. Only if the firm is insolvent
B. Yes, under the rule of ‘holding out’
Explanation: Under section 14 of the Partnership Act 1890, if a third party reasonably believes a person is still a partner (due to continued use of their name), that person may be held liable for partnership debts.
Rachel lends money to a partnership in exchange for a percentage of profits. The firm later collapses with significant debts. Can Rachel be held liable for partnership debts?
A. Yes, automatically liable as a partner
B. No, because she is just a lender
C. Only if she was involved in management
D. Only if she agreed to share losses
D. Only if she agreed to share losses
Explanation: Under section 2(3) of the Partnership Act 1890, sharing profits is prima facie evidence of a partnership. However, if she did not agree to share losses, she is unlikely to be classified as a partner.
Steve and Tom operate a law firm as a partnership. Tom, without Steve’s knowledge, signs a contract to buy expensive office furniture. Can the firm be bound by this contract?
A. No, because Steve did not agree
B. Yes, if the purchase is in the usual course of business
C. Only if Tom signed in Steve’s name
D. No, because the contract was for a large amount
B. Yes, if the purchase is in the usual course of business
Explanation: Under section 5 of the Partnership Act 1890, a partner can bind the firm if the transaction is within the usual course of business. Office furniture is typically a necessary business expense for a law firm.
A partnership has three partners: Jack, Laura, and Omar. Jack signs a supply contract outside the usual scope of business. The supplier is unaware of this. Can the firm be bound by Jack’s contract?
A. Yes, under apparent authority
B. No, unless Laura and Omar ratify it
C. Yes, automatically under section 5 of the Partnership Act
D. No, because it was outside the usual business
D. No, because it was outside the usual business
Explanation: Under section 5 of the Partnership Act 1890, a firm is only bound by a partner’s acts if they are within the usual course of business. If Jack entered into an unusual transaction, the firm may not be bound unless ratified by the other partners.
