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Question 1

What is the Partnership Act 1890 and how does it govern traditional partnerships?

Answer 1

The Partnership Act 1890 (PA 1890) is the legislation that governs traditional partnerships. It covers how traditional partnerships are formed and used, the liability of partners, and the relationship between the firm and outsiders.

Question 2

How is a traditional partnership defined and established?

Answer 2

A traditional partnership is defined as a relationship between persons carrying on a business in common with a view to making a profit. It is very easy to establish a partnership as no formality is required. Partnerships can arise even if individuals are unaware that a partnership has formed.

Question 3

Can a company be a partner in a traditional partnership?

Answer 3

Yes, a company can be a partner in a traditional partnership. The Partnership Act 1890 does not distinguish between actual and legal persons.

Question 4

What are the advantages and disadvantages of conducting business through a partnership?

Answer 4

Advantages of partnerships include low cost of establishment, no required formalities for running the partnership, and a high degree of confidentiality. Disadvantages include unlimited liability and default provisions that may be unsuited to the modern business environment.

Question 5

What is the fiduciary relationship between partners in a partnership?

Answer 5

Partners in a partnership have an overriding duty of good faith towards each other, similar to the duty of a trustee to a beneficiary. This duty is reflected in sections 28, 29(1), and 30 of the Partnership Act 1890.

Question 6

What is the personal liability of partners in a partnership?

Answer 6

Partners in a partnership are personally liable for the debts and obligations of the firm. The Partnership Act 1890 contains provisions relating to the nature and extent of such liabilities. Non-partners can also become personally liable in certain circumstances.

Question 7

Under what circumstances can a former partner still be liable for partnership debts?

Answer 7

A former partner can become liable for partnership debts incurred after they have left if a third party has not been notified of their departure and treats all apparent partners of the firm as jointly liable. However, a former partner will not be liable for debts to any third party who did not know them to be a partner before they left.

Question 8

What is the concept of ‘holding out’ in relation to partnerships?

Answer 8

Holding out refers to circumstances where a non-partner may be personally liable on a partnership debt if they have held themselves out as a partner or have knowingly allowed themselves to be held out as a partner. The liability of the firm for the acts of a non-partner is established by applying the common law principles of agency.

Question 9

How is taxation handled in partnerships?

Answer 9

Each partner in a partnership is liable to tax as an individual on their share of the income or gains of the partnership. This is known as tax transparency. Partners submit their own individual tax returns containing all income received from the partnership, along with other income receipts.

Question 10

What are the implications of Section 5 of the Partnership Act 1890 in determining whether a firm is bound by a contract made by a partner?

Answer 10

Section 5 of the Partnership Act 1890 provides a special statutory rule of agency that applies when the agent is a partner in the firm. It establishes whether the firm is bound by a contract made by a partner based on the partner’s authority and the third party’s reliance on that authority.

Question 11

What is apparent authority at common law and how does it relate to partnerships?

Answer 11

Apparent authority at common law arises when a principal represents or permits a representation to be made to a third party that a person has authority to bind the firm. If the third party relies on this representation, the principal (firm) is bound by the actions of that person. Holding out is an example of apparent authority in partnerships.

Question 12

What are the advantages and disadvantages of conducting business through a partnership compared to a limited company?

Answer 12

Advantages of partnerships include low cost of establishment, no required formalities for running the partnership, and a high degree of confidentiality. Disadvantages include unlimited liability and default provisions that may be unsuited to the modern business environment. Limited companies, on the other hand, have separate legal personality, limited liability, and more regulatory requirements.

Question 13

Why do some clients seek to avoid creating a partnership?

Answer 13

Clients may seek to avoid creating a partnership due to concerns about unlimited liability, unsuited default provisions, and the desire to maintain a high degree of confidentiality. The legislation governing partnerships, the Partnership Act 1890, is over 130 years old and may not be suitable for modern business environments.

Question 14

What is the liability of a partner in a partnership for the tax on other partners’ shares of partnership profits?

Answer 14

Unlike with other partnership liabilities where each partner is jointly and severally liable, a partner is not liable for the tax on other partners’ shares of partnership profits.

Question 15

How is capital gains tax applied in the context of a partnership?

Answer 15

Normal capital gains tax principles apply on the disposal of a capital asset by a partnership. Each partner is treated as owning a fractional share of the asset, and on disposal by the partnership, each partner is treated as making a disposal of their share and will be taxed on this share of any gain, subject to the availability of any reliefs available to individuals.

Question 16

What is the basis for determining a partner’s fractional share of an asset in a partnership?

Answer 16

A partner’s fractional share is based upon the agreed profit sharing ratio (PSR) or, if there is no agreed PSR, then equally in accordance with s 24(1) PA 1890.

Question 17

What are the key characteristics of a partnership according to the Partnership Act 1890?

Answer 17

Partnerships are governed by the Partnership Act 1890. Partnerships are NOT a separate legal entity from its partners. Partners in a partnership have joint liability in contract and potentially joint and several liability for partnership debts, as well as joint and several liability in tort.

Question 18

What is the role of the Partnership Act 1890 in regulating partnerships?

Answer 18

The Partnership Act 1890 provides the framework for regulating traditional partnerships. Most of the sections of the act may be overridden by agreement between the partners. The act also contains default provisions that apply in the absence of any contrary agreement.

Question 19

What are the advantages of conducting business through a partnership?

Answer 19

Conducting business through a partnership allows for a high degree of confidentiality regarding the business’s affairs. Partnerships are tax transparent, meaning that the partners themselves pay income tax and capital gains tax on their share of profits and gains.

Question 20

What are the common provisions that should be included in a partnership agreement?

Answer 20

A partnership agreement should cover provisions such as commencement and duration, partnership name and place of business, partnership property, capital, profits and losses, drawings/salary, accounts, dissolution of the partnership, duties, powers and restrictions on partners, partnership decision making, incoming partners, retirement/expulsion of existing partners, non-compete/other restrictions, and other common provisions.

Question 21

What are the default provisions of the Partnership Act 1890 regarding partnership property?

Answer 21

Under the Partnership Act 1890, all property brought into the partnership on account of the firm or for the purposes and in the course of the partnership business is considered partnership property. Each partner is deemed to own a share in the partnership property. The default provisions also state that partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses of the business.

Question 22

What are the considerations for including non-compete clauses in a partnership agreement?

Answer 22

It is common for a partnership agreement to contain an express clause preventing current partners from competing with the firm. This is implied by default under s 30 of the Partnership Act 1890. The agreement may also include non-solicit and non-dealing clauses to further restrict outgoing partners from competing with the partnership.

Question 23

How can a partnership be dissolved according to the Partnership Act 1890?

Answer 23

A partnership can be dissolved in several ways under the Partnership Act 1890, including automatic dissolution upon expiry of a fixed term or completion of a specific venture, death or bankruptcy of any partner, dissolution by notice from any partner, dissolution if the partnership business becomes unlawful, and dissolution by court order as a last resort.

Question 24

What happens when a partner leaves a partnership?

Answer 24

If there is no partnership agreement or if the agreement is silent on retirement or termination, the effect of a partner leaving is that the partnership is dissolved. However, it is possible to include provisions in the partnership agreement to allow the partnership to continue as between the remaining partners and to provide for the buyout of a departing partner’s share.

Question 25

What are the restrictions on outgoing partners in terms of competition with the partnership?

Answer 25

Partnerships may include non-compete clauses in the partnership agreement to prevent former partners from competing with the business. These clauses must be reasonable in terms of duration, geographical area, and scope, and necessary for the protection of a legitimate business interest of the partnership.

Question 26

What are the key provisions that should be included in a partnership agreement?

Answer 26

A partnership agreement should cover provisions such as commencement and duration, partnership name and place of business, partnership property, capital, profits and losses, drawings/salary, accounts, dissolution of the partnership, duties, powers and restrictions on partners, partnership decision making, incoming partners, retirement/expulsion of existing partners, non-compete/other restrictions, and other common provisions.

Question 27

What happens when a partnership is dissolved?

Answer 27

When a partnership is dissolved, the partnership relationship ceases, and any partner may demand that the assets of the business are realized.

Question 28

What happens to the assets of a partnership when it is wound up?

Answer 28

Once all debts and liabilities have been paid, the remaining money/assets will be distributed so that each partner is paid back their original capital first. If there is a surplus, it is typically shared out according to an agreed asset surplus ratio (ASR) or profit share ratio (PSR). If there is no agreed ASR or PSR, the surplus assets are shared equally.

Question 29

What are the default provisions in the absence of an LLP agreement?

Answer 29

· Members share equally in capital and profits(Reg 7(1));
· An LLP must indemnify its members for payments made and personal liabilities incurred by them in the ordinary and proper conduct of the business of the LLP (Reg 7(2));
· Every member may take part in management (Reg 7(3));
· No member is entitled to remuneration for managing the LLP (Reg 7(4));
· No person can become a member or assign their membership without the consent of all existing members (Reg 7(5));
· Ordinary decision making may be by the majority of the members. Any proposed change to the nature of the business requires the consent of all the members (Reg 7(6));
· The books and records of the LLP must be available for inspection by the members at the registered office (Reg 7(7));
· Each member must give true accounts and full information of all things affecting the LLP to any member or his legal representative (Reg 7(8));
· If a member (without consent) carries on any business of the same nature as, and competing with, the LLP then they must account for and pay over to the LLP all profits made by them in the business (Reg 7(9));
· Every member has a duty to account for benefits derived from transactions with the LLP and its business or property (Reg 7(10));
· There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a Members’ Agreement (Reg 8).

Question 30

What are the characteristics of a limited liability partnership (LLP)?

Answer 30

LLPs have characteristics of both companies and partnerships. They have a separate legal personality, limited liability for members, and the flexibility of profit sharing and decision making like a partnership. However, they also have to file accounts at Companies House and are subject to certain provisions of company and corporate insolvency law.

Question 31

Why were limited liability partnerships (LLPs) introduced?

Answer 31

LLPs were introduced to provide professional partnerships with the flexibility of a partnership structure while offering limited liability protection to its members. This was in response to the perception that traditional partnerships did not provide sufficient protection against litigation and unlimited liability for debts.

Question 32

How are LLPs taxed?

Answer 32

LLPs are tax transparent, meaning the LLP itself is not taxed. Instead, the members are individually liable for income tax or capital gains tax on their share of the LLP’s income or gains. This allows for a high level of participation in management while benefiting from limited liability.

Question 33

What are the obligations of designated members in an LLP?

Answer 33

Designated members in an LLP have obligations such as signing the accounts on behalf of the members, making filings at Companies House, and acting on behalf of the LLP if it is wound up. They play a key role in the management and compliance of the LLP.

Question 34

What is the continuing registration regime for LLPs?

Answer 34

LLPs are required to file information with Companies House, including changes in name, registered office, membership, creation of charges, annual confirmation statements, and accounts. They must also maintain in-house records of members and people with significant control (PSCs).

Question 35

How is an LLP formed?

Answer 35

An LLP is formed by two or more persons associated for carrying on a lawful business with a view to profit. The subscribing members fill out a Form LL IN01 and submit it to Companies House for registration. Once registered, the LLP is issued a certificate of incorporation

Question 36

What is the LLP agreement and is it necessary?

Answer 36

The LLP agreement is a private document that sets out the formal procedures and arrangements agreed upon by the members for the operation of their business. While an LLP is not obliged to have a formal agreement, it is recommended to regulate the relationship between members and address key issues.

Question 37

What is the clawback rule in relation to LLPs?

Answer 37

The clawback rule for LLPs means that in certain circumstances, money taken out of the LLP by members up to two years before the winding up of the LLP can be clawed back into the pool of assets available to repay the LLP’s creditors.

Question 38

What are the advantages of LLPs as a separate legal entity?

Answer 38

LLPs have the advantage of being a separate legal entity, similar to companies. They must be incorporated and registered at Companies House. LLPs have members rather than partners, and they can contract with third parties on their own behalf. Liability for debts rests with the LLP, not its members. Additionally, LLPs benefit from tax transparency.

Question 39

What should clients consider when using an LLP?

Answer 39

Clients considering using an LLP should consider drafting a Members’ Agreement. This agreement outlines the rights and responsibilities of the members and helps ensure smooth operation of the LLP.

Question 40

How are decisions made in an LLP?

Answer 40

Every member may take part in management of an LLP. Ordinary decision making may be by the majority of the members. However, any proposed change to the nature of the business requires the consent of all the members

Question 41

What happens if one member decides to leave an LLP?

Answer 41

If one person decides to leave an LLP, the LLP will continue as a separate legal entity. If there are only 2 members and one leaves, then the LLP is allowed to drop to one designated member for up to 6 months before the sole member will be jointly and severally liable with the LLP for any debts incurred after that 6 month period.

Question 42

Is there a power of expulsion of a member in an LLP?

Answer 42

There is no implied power of expulsion of a member by the majority unless the members have expressly provided for such a power in a Members’ Agreement. A member cannot be expelled by majority vote unless all the members have previously agreed that a majority can do this.

Question 43

What are the characteristics of a traditional partnership?

Answer 43

A traditional partnership is defined as a relationship between persons carrying on a business in common with a view to making a profit. It is not a separate legal entity from the partners themselves, and the partners are personally liable for the debts and obligations of the firm. Partnerships are tax transparent, meaning each partner is individually liable for tax on their share of the income or gains of the partnership.