Workshop 1

Question 1

What is a partnership?

Answer 1

-Traditional partnerships are governed by the Partnership Act 1890 (‘PA 1890’).
-A traditional partnership is very easy to establish. No formality is required because a partnership is defined simply as a relationship between persons carrying on a business in common with a view to making a profit (s 1(1) PA 1890).
-A partnership is NOT a legal entity separate from the partners themselves.
-There must be at least two persons to form a partnership. The PA 1890 does not distinguish between actual and legal persons, so a company could be a partner.
-There are no required formalities for running a partnership and no filing or disclosure requirements, in contrast to companies which are heavily regulated.

Question 2

Formation of partnerships

Answer 2

There doesn’t have to be any intention on the part of the parties to be, or form, a partnership. A partnership arises if, on the facts, the criteria in s 1(1) PA 1890 are met.
Section 2 PA 1890 contains a list of rules for determining the existence of a partnership. The purpose of s 2 is to provide more detailed guidance in determining if the criteria in s 1(1) PA 1890 have been met.
For example:
* Evidence of profit sharing will be prima facie evidence of a partnership.
* If all individuals take part in decision making, this also makes it more likely that a partnership will be held to exist.
* A loan of money by one party to another does not create a partnership. Case law has also held that if the person is not being ‘held out’ as a partner this makes the existence of a partnership less likely.

Question 3

Relationship of partners to one another: Fiduciary relationship

Answer 3

There is an overriding duty of good faith in a partnership.
The duty owed by the partners to one another is similar to that owed by a trustee to a beneficiary. These equitable principles are reflected in the following sections of the PA 1890:
-Honest and full disclosure (s 28 PA 1890)
-Unauthorised personal profit (s 29(1) PA 1890)
-Conflict of duty and interest (s 30 PA 1890)

Question 4

Personal liability for partnership debts

Answer 4

Because a partnership has no separate legal personality from the partners, the partners are personally liable in relation to contracts which are binding on the firm. The PA 1890 contains provisions relating to the nature and extent of such liabilities. In some circumstances, non-partners can also become personally liable.

Question 5

are partners contractually liabile for debts of the firm

Answer 5

Every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm incurred whilst they are a partner (s 9 PA 1890).

Question 6

Tortious liability

Answer 6

In tort the partners’ liability is joint and several (ss 10 and 12 PA 1890).
Note that if a creditor obtains judgment against one, or a number of the partners, this will not discharge the others (section 3 Civil Liability (Contribution) Act 1978) so technically liability is joint and several.

Question 7

Liability of non-partners: new partners (s 17 PA 1890)

Answer 7

Under s 17(1) a new partner will not automatically be liable in relation to any debts incurred by the partnership before they joined.
Under s 17(2) a partner will still be liable after they retire in respect of debts incurred by the partnership whilst they were a partner. In order to relieve a partner from an existing liability once they retire, a partnership may novate the relevant agreement; this must be with the consent of the creditor (s 17(3)).

Question 8

Liability of non-partners: former partners (s 36 PA 1890)

Answer 8

It is also possible for a former partner to become liable for partnership debts incurred after they have left. If a partner leaves, a third party can treat all apparent partners of the firm (ie before the departure) as jointly liable to pay any new debt incurred by the partnership UNLESS that third party has been notified of this change either by:
* actual notice (s 36(1) PA 1890) - for those who have had actual dealings with the partner before departure; or
* constructive notice by virtue of publication of the departure in the London Gazette (s 36(2) PA 1890) -for those who have not had actual dealings with the partner before departure.
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. No notice at all has to be given to such persons.

Question 9

Liability of non-partners: ‘holding out’ (s 14 PA 1890)

Answer 9

s.14 PA 1890 sets out circumstances where a non-partner may be personally liable on a partnership debt if they have held themselves out as a partner.

The elements required for s 14 PA 1890 to have effect are:
(i) a representation to a third party to the effect that a person is a partner,
(ii) the third party’s action in response (‘giving credit to the firm’, eg by supplying goods or services to the firm), and
(iii) the third party’s state of mind (‘believing (having faith in) the representation’).

It is important to appreciate that s 14 PA 1890 relates to the liability incurred by the NON-PARTNER, not the liability of the firm.

Question 10

The relationship between the firm and outsiders: contracts binding the firm

Answer 10

In practice, you may need to decide whether or not the partnership is bound by a contract which an individual has purported to make on its behalf.
In a partnership context, your approach to answering the question of whether or not a firm is bound by a particular contract will differ depending on whether the individual acting on the firm’s behalf is a partner or not.

Question 11

Individual acting as agent (whether partner or non-partner)

Answer 11

In many cases, an individual acting as a firm’s agent (whether a partner or not) will simply have put into effect the wishes of the partnership as a whole.
If all the partners are happy for the firm to enter into the contract and have given actual, express or implied authority to bind the firm, then the firm will be bound.
In any event, if the partners are happy to be bound, the situation is not problematic even if the agent had no authority at the time the contract was made.
The partners are able to ratify (ie approve) the agent’s act and adopt the contract, either expressly or simply by going ahead and performing it.

Question 12

Partners not content with agent’s act

Answer 12

The situation is more complex where the other partners are not content with the agent’s act.
(a) Power of a partner to bind the firm against the others’ wishes: s 5 PA 1890
Section 5 PA 1890 provides for the firm to be bound in certain circumstances, even where the other partners are not happy to be bound by the contract made by the agent. Since s 5 PA 1890 is intended to protect the third party to the contract, it is that third party’s view of what is happening that counts.
Section 5 PA 1890 is always the first place to look when deciding whether or not an act of a partner binds a firm but does not displace the application of ordinary common law agency entirely. In some circumstances, s 5 PA 1890 alone will not get you to the end of the story. If a partner has purported to form a very unusual kind of contract on behalf of the firm, a s 5 PA 1890 analysis may lead you to conclude that the firm is not bound under statute. However, the particular facts and circumstances of the case may mean that this partner did have their partners’ apparent authority at common law to conclude the contract.
Following s 5 PA 1890 a partner’s unauthorised act will bind the firm if, viewed objectively:
* the act is for carrying on business of the kind carried on by the firm (ask, for example, ‘is this the kind of contract that one would expect to be entered into in the course of business of this kind?’); and
* the act is for carrying on such a business in the usual way (ask, for example, ‘is this the kind of contract that a partner acting alone would usually make on the firm’s behalf or is it a contract of the kind an outsider would expect all partners in a firm to sign individually?’).
The firm will not be bound, however, if:
* the third party actually knew that the partner in question was not authorised to enter into the contract on behalf of the firm; or
* the third party did not know or believe that the partner was a partner.
A partner who binds their firm without actual authority may be liable to the other partners for breach of contract.
(b) Power of a non-partner to bind the firm against the partners’ wishes: apparent authority at common law
Section 5 PA 1890 does not apply at all if the person entering the contract is not in fact a partner. In that case, the common law rules of agency establish whether or not the firm is bound as principal.
At common law, an agent who has no actual authority may still bind the firm if he has apparent authority to enter into a contract. Apparent (sometimes called ‘ostensible’) authority arises when the principal (here the firm) represents or permits a representation to be made to a third party that a person has authority to bind the firm. For example, if a firm employs somebody under the title ‘marketing manager’ that title confers on that person apparent authority to bind the firm on marketing decisions. Once the principal’s representation has been made to, and relied upon by, the third party, the principal is bound by the actions of that person.
If the representation is that a particular person is a partner (when, in fact, they are not), then the firm is said to be ‘holding out’ that person as a partner. A person who has been held out as a partner has apparent authority to bind the firm in the same way as a real partner can. An example of holding out is in relation to an ex-partner, when the firm carries on using old letterhead (including that partner’s name) after they retire.

Question 13

Taxation of Partnerships

Answer 13

Each partner is liable to tax as an individual on their share of the income or gains of the partnership. This is described as tax transparency.
Even though a partnership is not a distinct legal entity and therefore does not itself pay tax, HMRC requires a partnership to make a single tax return of its profits which must be agreed with HMRC (as with sole traders, partnerships choose their own accounting period).
Partners also submit their own individual tax returns containing all income received from the partnership as well as other income receipts (including, for example, from savings, dividend and/or rental income).
Partners in a partnership are liable to pay both income tax and capital gains tax. The details are set out on the next slide.

Question 14

Taxation of Partnerships - Income tax

Answer 14

Each partner is personally liable for the income tax on their share of the partnership profits.
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

Taxation of Partnerships - Capital gains tax

Answer 15

Normal capital gains tax principles apply on disposal of a capital asset by a partnership.
Each partner is treated as owning a fractional share of the asset. 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. A partner’s fractional share shall be 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 16

Liability of non-partners: new partners (s 17 PA 1890)

Answer 16

Under s 17(1) a new partner will not automatically be liable in relation to any debts incurred by the partnership before they joined.
Under s 17(2) a partner will still be liable after they retire in respect of debts incurred by the partnership whilst they were a partner. In order to relieve a partner from an existing liability once they retire, a partnership may novate the relevant agreement; this must be with the consent of the creditor (s 17(3)).

Question 17

Liability of non-partners: former partners (s 36 PA 1890)

Answer 17

It is also possible for a former partner to become liable for partnership debts incurred after they have left. If a partner leaves, a third party can treat all apparent partners of the firm (ie before the departure) as jointly liable to pay any new debt incurred by the partnership UNLESS that third party has been notified of this change either by:
* actual notice (s 36(1) PA 1890) - for those who have had actual dealings with the partner before departure; or
* constructive notice by virtue of publication of the departure in the London Gazette (s 36(2) PA 1890) -for those who have not had actual dealings with the partner before departure.
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. No notice at all has to be given to such persons.

Question 18

Liability of non-partners: ‘holding out’ (s 14 PA 1890)

Answer 18

Generally, a person who is not a partner has no personal liability for partnership debts.
However, s 14 PA 1890 sets out 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 so held out).
The elements required for s 14 PA 1890 to have effect are:
(i) a representation to a third party to the effect that a person is a partner,
(ii) the third party’s action in response (‘giving credit to the firm’, eg by supplying goods or services to the firm), and
(iii) the third party’s state of mind (‘believing (having faith in) the representation’).
It is important to appreciate that s 14 PA 1890 relates to the liability incurred by the NON-PARTNER, not the liability of the firm. The liability of the firm for the acts of a non-partner is established by applying the common law principles of agency.

Question 19

limited liability partnerships

Answer 19

An LLP is a hybrid vehicle. This means it has elements of both a company (legally it is a body corporate and is treated as a separate legal entity from its members: s 1(2) Limited Liability Partnerships Act 2000 (‘LLPA’)) and a partnership (it is treated as tax transparent).
Consequently, an LLP has the flexibility of a partnership with the added advantage of limited liability for its members. Because an LLP is a body corporate, it has a legal personality which is separate to that of its members. As a result, it is liable for its own debts, and is able to contract with third parties.
The LLPA was enacted for several reasons, chief of which was the perception amongst professional partnerships that as a result of the growth in litigation, the current partnership model, whilst having many commercially useful features, did not provide the kind of protection that was available to limited liability corporations (this is because partners in traditional partnerships have unlimited liability for the debts of the partnership).
LLPs are increasingly important, and many law firms are now run as LLPs.

Question 20

Commercial Uses for LLPs

Answer 20

Apart from being commonly used for professional partnerships, such as solicitors, surveyors or accountants, the LLP is also a flexible business vehicle for joint ventures, certain investment schemes and some venture capital investments.
LLPs are particularly useful for investment structures (despite certain tax avoidance measures being applicable to LLPs which may impinge on private investors who are members of an LLP).
This is because, as stated, LLPs are tax transparent, so they allow a high level of participation in management by the members whilst giving the members the benefit of limited liability.
LLPs are also increasingly being used by property developers involved in one-off joint venture development projects.

Question 21

Applicable legislation to LLP’s

Answer 21

LLPs are incorporated pursuant to the LLPA. The LLPA is supplemented by two statutory instruments:
* the Limited Liability Partnerships Regulations 2001 (SI 2001/1090) (as amended) (the ‘2001 Regulations’) which deal with insolvency and the internal governance of LLPs and
* the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 (SI 2009/1804) (as amended) (the ‘2009 Regulations’) which govern the corporate law aspects of LLPs. In particular, the 2009 Regulations apply provisions of CA 2006 to LLPs (with appropriate amendments). You will note, therefore, that LLPs are primarily governed by a company (rather than partnership) law framework.
The Insolvency Act 1986 (’IA’) and the Company Directors Disqualification Act 1986 have, since LLPs were introduced, applied to LLPs in modified form. This has important consequences, so that, for instance, s 213 IA (fraudulent trading), s 214 IA (wrongful trading), as well as the disqualification of director provisions and the greater part of the insolvency and winding up procedures apply equally to LLPs and their members as for companies. The Economic Crime and Corporate Transparency Act 2023 (‘ECCTA’) has resulted in changes to the underlying legislation to LLPs.

Question 22

Formation of an LLP

Answer 22

Section 2(1)(a) LLPA states that two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP. A ‘person’ in this context can be a company as well as an individual. The use of the word ‘business’ requires that there must be some commercial activity, so LLPs are not normally used by non-profit organisations as business vehicles.
Registration at Companies House (Form LL IN01), which is sent to Companies House with the relevant fee. The form must state, inter alia, the name of the LLP, its registered office’s address, registered email address and which members, if not all of them, are to be designated members (s 2(2) LLPA). Companies House can challenge or reject information that it believes is inaccurate, incomplete or fraudulent.
Since March 2024, the registered address must also be an “appropriate registered address”

Certificate of Incorporation
Once registered, the Registrar of Companies issues a certificate of incorporation as conclusive evidence that all legal requirements have been complied with. The name of the LLP will be entered on the index of company names and given a number.

Question 23

What information are LLP’s required to file at companies house?

Answer 23

• change of name,
• change of registered office, and e-mail,
• changes in membership,
• creation of a charge,
• annual confirmation statement, and
• accounts(under the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008).

LLP must maintain certain in-house records, including registers of its members and of its ‘people with significant control’

Question 24

How many members must an LLP have?

Answer 24

An LLP must have at least two formally appointed members at all times. There is no limit on the maximum number of members an LLP can have.
At least two members of the LLP must be ‘designated members’. Their obligations include, amongst other things, 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.

Question 25

When will a member cease to be a member of an LLP

Answer 25

Section 4(3) LLPA states that a member will cease to be a member of the LLP upon:
* their death;
* agreement with the other members of the LLP;
* giving notice to the other members of the LLP; or
* dissolution (if the member is a body corporate).

Question 26

Does an LLP have a memorandum or articles of association

Answer 26

An LLP has no Memorandum or Articles of Association. The LLPA and the 2001 Regulations do not lay down any particular management structure to be adopted, in contrast to companies. LLPs therefore have complete flexibility in terms of management. Therefore, it is necessary in practice to have an LLP or Members’ Agreement stating how these issues are to be dealt with by the LLP and its members, in a very similar way to how a partnership agreement is designed to operate.
The LLP Agreement is a private document which sets out the formal procedures and arrangements which the members have agreed to be the basis of the operation of their business.
Note that members of an LLP are not obliged to have a formal Members’ Agreement to regulate their relationship.

Question 27

LLP default positions

Answer 27

The eleven default provisions in the absence of an agreement:
* Members share equally in capital and profits
* 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
* Every member may take part in management
* No member is entitled to remuneration for managing the LLP
* No person can become a member or assign their membership without the consent of all existing members
* 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
* The books and records of the LLP must be available for inspection by the members at the registered office
* Each member must give true accounts and full information of all things affecting the LLP to any member or his legal representative
* 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
* Every member has a duty to account for benefits derived from transactions with the LLP and its business or property
* 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

Question 28

Taxation of LLP’s

Answer 28

One important difference between an LLP and a company is that, for tax purposes, the LLP is treated as a partnership.
If two individuals set up an LLP, each will be taxed as an individual, ie liable to income tax or capital gains tax on their share of the income or gains of the LLP. In other words, an LLP is ‘transparent’ for tax purposes – the LLP is not taxed, but the partners are.
By contrast, a company, established by the same two individuals, would pay corporation tax on its own income profit and chargeable gains. If the individual owners then receive dividends out of the company’s profits (after corporation tax has been paid by the company), they may be liable to pay income tax on their dividend income. This could be significant, for example, because different rates and reliefs might apply to the different regimes.
A trade, profession or business carried on by an LLP with a view to profit will be treated as being carried on in partnership by the members (not the LLP itself). Many of the same reliefs available to partners also may be available to LLP members, such as relief on interest, or set off of losses against other income.
Assets held by the LLP will be treated as being held by the members as partners for capital gains tax purposes. Accordingly, a disposal of an LLP asset, such as land, will be regarded by HMRC as a disposal by the members of the LLP while it is trading.
The LLPA gives relief from stamp duty where a partnership is incorporated as an LLP and assets of the partnership business are transferred to the LLP, subject to strict tax avoidance conditions. In some circumstances, stamp duty and/or SDLT is payable on the transfer of an interest in an LLP at the relevant rate.
As regards VAT, the LLP itself may register for VAT, not the members.

Question 29

Corporate characteristics of LLP’s

Answer 29

• Separate legal personality;
• Limited liability for members, subject to the restrictions mentioned;
• LLPs have to file accounts at Companies House on much the same basis as companies, leading to a loss of financial privacy (which is one of the main attractions of using a partnership structure);
• LLPs, like companies, are capable of creating a floating charge over the assets of the LLP, unlike a partnership; and
• Some provisions of company law (in particular the CA 2006) and corporate insolvency law (as contained in the Insolvency Act 1986 and the Company Directors Disqualification Act 1986) apply to LLPs in modified form.

Question 30

Partnership characteristics of LLP’s

Answer 30

• LLPs have no share capital or capital maintenance requirements;
• No real distinction between members and the management board (unlike a company, in which the members/shareholders and board of directors have very distinct roles);
• Members can agree amongst themselves how to share profits, management duties, how decisions are to be made, how new members are to be appointed and what retirement provisions shall apply;
• The Members’ Agreement (if there is one) is like a private partnership agreement;
• LLPs are tax transparent in the same way as a partnership;
• The corporate insolvency regime also applies to LLPs but there is an important disadvantage for members of an LLP compared to those of a company. LLPs are subject to the ‘clawback’ rule, which means that in certain circumstances money taken out of the LLP by members up to two years before commencement of a winding up of the LLP can be clawed back into the pool of assets available to repay LLP’s creditors (s 214A IA).