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SQE - BLP > WS1- Intro to Business Models and Partnership Agreements > Flashcards

WS1- Intro to Business Models and Partnership Agreements Flashcards

1
Q

Introduction: How are they established and what does this mean?

A
  • No formality is requried as partnership is defined simply as relatiionshp between persons carrying on a business in a common view to make profit. S1 PA
  • This means sometimes, partners may be unaware partnership have arisen if having no egal advice.
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2
Q

Introduction: What is a partnership not?

A

It is not a legal entity seperate from the partners thmeselves.

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3
Q

Introduction: What is required for a partnership?

A

Must be at least two persons to form a partnership and PA does not disinguish between actual/legal persons so a company can be a partner.

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4
Q

(a) Formation of Partnerships: What is not required?

A

There does not have to be an intention on parties to be or form a parnership and one will arise simply if on facts, S1 PA above met.

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5
Q

(a) Formation of Partnerships: What are the rules to determine existance of partnership?

A

S2 sets out list of rules to establish:
* Evidence of profit sharing will be prima facie evidence but not necessaily conclusive evidence and case law shows if losses also shares then makes it likely to exist.
* If all indiividuals involved in decision making, makes it more likely.
* Loan of money by one to another does not create and case law held if person not being “held out” as partner, then it will make it less likely.

**The facts are essential to determine if partnership exists. **

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6
Q

(b) Use of Partnerships: Why may clients ask you to help avoid creating a partnership rather than make one?

A

PA 1890 is old legislation and default provisions implied are often unsuited for modern business and clients will have concerns above unlimited liabiltiy

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7
Q

(b) Use of Partnerships: What are advantages of partnerships?

A
  • Costs nothing to create as no fomalities.
  • No required formalities for runnign such as no filing or disclosure requirements in contrast to companies which are heavily regulated which allows for high degree of confidentially.
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8
Q

(c) Fiduciary relationship of partners: What is the overriding duty?

A

Partners owe overriding duty of good faith.

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9
Q

(c) Fiduciary relationship of partners: What must partners ensure they do/meet?

A
  • Honest and full disclosure
  • Unauthorised personal profit
  • Conflict of duty and interest

Note - If creditor obtains judgement against one or a number, this will not discharge other so techically liabiltiy is joint and several.

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10
Q

(d) Personal liability for partnership debts: What is the liabiltiy of partners?

A

Since it has no seperate legal personality, parners are personally liable in relation to contract which are binding on the firm.

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11
Q

(d) Personal liability for partnership debts: What does PA act set out for nature/extent of such liability?

A
  • Contractual liability - Every partner is liability jointly with other partners for all debts and obligations of firm incurred whilst partner.
  • Tortious liability - In tort, partners laibility is joint and several.
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12
Q

(d) Personal liability for partnership debts - Non Partners: 1) What is the position for new partners? (S17)

A
  • Under S17(1) a new partner will not automatically be liabile in relation to any debts incurred by partnership before they joined.
  • Under 17(2) a partner will still be laible after they retire in respect of debts incurred by partnership while partner and in order to relieve liability, partnership may novate the relevant agreement but creditor must consent.
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13
Q

(d) Personal liability for partnership debts - Non Partners: 2) What is the position for former partners? (S36)

A
  • Former partner could also become liable for debts incurred after they leave.
  • TP can treat all apparent partners of firm (i.e before depature) as jointly liable to pay any new debt incurred unless TP has been notified of this change either by:

Actual notice - For those who had actual dealing with the partner before departure
Constructive notice - By viture of publication of departure in the London Gazaette for those without actual dealings with partner before departure.

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14
Q

(d) Personal liability for partnership debts - Non Partners: 2) What will former partner not be liable for?

A

Any debts to TP who did not know themto be a partner before they left and no ntoice has to be given to these persons.

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15
Q

(d) Personal liability for partnership debts - Non Partners: 3) What is the position for “holding out”

A
  • Generally, person not a partner has no personal liability for partnership debts.
  • However, S14 PA sets out circumstances where non-partner may be personally liable on partnership debt if hel themselves out as a partner or knowingly allowed themselves to be held out.
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16
Q

(d) Personal liability for partnership debts - Non Partners: 3) What are the elements under S14 foor holding out?

A
  • A representation to TP to effect that a person is a partner.
  • The T’s action in response such as giving credit to firm or supplying goods/service.
  • TP state of mind was believing or having faith in the representation.

Note - Appreciate that S14 relates to liability incurred by the non-partner and not the liability of firm, but liability of firm for acts on non-partner is established through agency.

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17
Q

(e) Relationship between firm and outsiders: Conracts binding the firm: What must be considered in practice?

A

May need to decide if or not partnership is bound by a contract which individual purported to make on its behalf.

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18
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: How do you determine if a firm is bound by a contract?

A

This will depend if individual acting on the firms behalf or not:

  • Partners: S5 PA intrudces special statutory rule of agency which applies only when agent is a partner in the firm and common law agency may apply where S5 not relevant.
  • Non-Partners: Common law of agency will apply and S5 does NOT apply.
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19
Q

(e) Relationship between firm and outsiders: Contracts binding the firm - 1) Partners content What is position where partners content with agents act (whether partner or non-parner?

A
  • Most cases, individual acting as firms agent (if partner or not) will simply put in effect wishes as partnership as whole.
  • If this is the case and given actual, express or implied authority then firm will be bound.
  • Even if agent had no authority at time of contract but partners happy to be bound, no issue as partners can ratify (approve) the act and adopt contract either expressly or simply by performing it.
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20
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 2) Partner binding against others wishes? Can partner bind firm against others wishes?

A

S5 provides firm to be bound in certain circumstances, even if other partners not happy to be bound by the contract and since S5 is to protect TP’s it is the TP’s view that is relevant.

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21
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 2) Partner binding against others wishes? What must you first consider to decide if it will bind the firm?

A
  • S5 is always first place but does not displace common law agency entirely.
  • So, if partner has formed a very unusual kind of contract, S5 analysis may lead you to conclude firm is not bound, but particular facts of case may mean partner did have partners apparent authoirty at common law.
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22
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 2) Partner binding against others wishes? When under S5 will unauthoised act bind the firm when viewed objectively?

A
  • The act is for carrying on business of kind carried on by the firm (So, would you expect firm to enter such contract?)
  • The act is for carrying on such business in the usual way (Is this kind of contract a partner acting alone would usually make or would outsider expect all partners to sign?
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23
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 2) Partner binding against others wishes? When will a firm not be bound?

A
  • If the TP actually knew the partner in question was not authorised to enter
  • TP did not know or believe that the partner was a partner
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24
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 2) Partner binding against others wishes? Who may the partner without actual authority be liabile to?

A

The other partners for breach of contract.

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25
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 3) Non-Partner binding against others wishes? What does not apply in these circumstances and what does instead?

A
  • As noted by FC 18, S5 does not apply if person entering contract is not a partner.
  • Instead, the common law rules of Agency establish if or not firm is bound.
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26
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 3) Non-Partner binding against others wishes? When may agent bind when non-partner?

A
  • At common law, agent who has no actual authority, may still bind if they have apparent authority to enter.
  • This arises when the firm represents or permits representation to be made to a TP that the person has authority to bind the firm. (E.G Firm employs a marketing manager” which title would confer apparent authority to bind on marketing decisions”
  • So, once firms represnetation made and relied on, the firm would be bound by the actions.
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27
Q

(e) Relationship between firm and outsiders: Contracts binding the firm: 3) Non-Partner binding against others wishes? What is the position for holding out?

A

Where representation a person is a partner but not, then firm is said to be holding out that person as partner.

If held out, that person has the apparent authority to bind firm in same way a real partner can an example would be a firm using the old letterhead of a retired partner.

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28
Q

(f) Taxation of Partnerships: What is tax transparancy and what does it mean?

A

Each partner is liable as an individual on their share of the income/gains of partnership which is known as tax transparancy.

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29
Q

(f) Taxation of Partnerships: What must the partnership do in respect of tax?

A

Despite no legal entity, and does not itself pay tax, HMRC requires partnership to make single tax retgurn of profits as with sole traders, partnership choose their own accounting period.

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30
Q

(f) Taxation of Partnerships: What must individual partners then do?

A

Partners then must submit their own individual tax returns containing all income received from partnership as well as other income receipts.

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31
Q

(f) Taxation of Partnerships - 1) Income Tax: How are partners liable?

A

Each partner personally liable for income tax on their share of partnership profits and unlike other liabilities where there is joint and several liable, a partner is not liable for tax on others.

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32
Q

(f) Taxation of Partnerships - 2) Capital gains tax: How are partners liable?

A

Normal capital gains tax principles apply on disposal of capital asset by partnership.

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33
Q

(f) Taxation of Partnerships - 2) Capital gains tax: How are capital gains divided?

A

Each partner treated as ownng a fractional share of the asset and on disposal, each is treated as having made disposal of their share and will eb taxed on any gain subject to any reliefs available.

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34
Q

(f) Taxation of Partnerships - 2) Capital gains tax: What will the amount of share be determined by?

A

Profit sharing ration (PSR) and if none, then equally.

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35
Q

(g) The Partnership Agreement: What is actual purpose of PA 1890?

A

It provides the framework for regulating traditional partnerships, but provisions are really there as a fall back in absence of a partnership ageement or if it is silent on any matter.

36
Q

(g) The Partnership Agreement: What does S5-18 deal with of the act?

A

These determine relationship between partners and third partners as well as liability for partnership debts.

Most of the provisions of the act may be overridden by agreement.

37
Q

(g) The Partnership Agreement - The agreement or deed: What will most partnerships have?

A

Most will have a form of express written agreement governing how the partnership should be run and we will review each provision in turn.

We will review below most important clauses in Partnership agreeements and compare to default position under PA 1980.

38
Q

(g) The Partnership Agreement - The agreement or deed - 1) Commencmenet and Duration: When will it commence and what is it useful to set out?

A
  • While it commences when S1 satisfied, useful for agreement to set out date which partners agree the particular rights and obligations will commence.
  • If they begin working prior to this, then default provisions will apply until commecment date of the agreement.
39
Q

(g) The Partnership Agreement - The agreement or deed - 1) Commencmenet and Duration: What type of term may it have?

A
  • May have fixed term or continue until terminated in accordance with provisions.
  • If fixed, but partners continue business after expiration without a new agreement, then it is presumed they are partners on the same terms - S27.
40
Q

(g) The Partnership Agreement - The agreement or deed - 2) Partnership name and place of business: What must the name not be?

A

Must not included Limited, Ltd, LLP, PLC, be the same as an existing trademark, be offensive or contain sensitve word or expression or suggest connection with goverment without permission.

41
Q

(g) The Partnership Agreement - The agreement or deed - 2) Partnership name and place of business: What should be set out for place?

A

Note the place of business and nature of it.

42
Q

(g) The Partnership Agreement - The agreement or deed - 3) Partnership Property: What is the position for property and lack of seperate legal entity?

A
  • Each partner deemed to own a share in the property belonging to the partnership.
  • Individual partners does not have a right to any particular asset.
43
Q

(g) The Partnership Agreement - The agreement or deed - 3) Partnership Property: What does PA 1890 set out inr espect of partnershp property?

A
  • S20 - Property brought into partnershp if by purchase or otherwise on account of firm or purposes in course of business is partnership property.
  • S21 - All property bought with money of firm is deemed to have been bought on account of firm unless contrary intention shown.
  • It is a question fo fact if asset is partnership property and depend on intention at time it is aquired which is subject and difficult to prove so sensible for parners to agree which assets are parntership property to minimise potential for dispute.
44
Q

(g) The Partnership Agreement - The agreement or deed - 4) Shares in income and cpaital and profits and losses: What is default position under PA?

A

Subject to any agreement express/implied, all partners are entitled to share equally in capital and profits and contribute equally towards losses even if parties contrbuted unequally.

45
Q

(g) The Partnership Agreement - The agreement or deed - 4) Shares in income and cpaital and profits and losses: What if default provisions do not align with wishes of partners?

A

Extremely important express provision setting out profit sharing ratio, although if unequal contributions, then potential for uimplied agreement if entitled to withdraw capital unequally.

46
Q

(g) The Partnership Agreement - The agreement or deed - 5) Drawings/Salary: What can partners do in respect of income profits?

A

Partners may take “drawings” from income and agreement should set out how much each can draw in any given period and in absence, S24 sets out all partners entitled to share equally in income profits.

47
Q

(g) The Partnership Agreement - The agreement or deed - 5) Drawings/Salary: What may some parties intend each receive?

A

A salary in addition to income profit share and this must be expressly set out as the default position is there is no entitlement to salary. - S24.

48
Q

(g) The Partnership Agreement - The agreement or deed - 6) Work input and roles/limits on authority: What is the position under PA?

A

Every partner may take part in management of business but not required to do so. S24

49
Q

(g) The Partnership Agreement - The agreement or deed - 6) Work input and roles/limits on authority: What should agreement therfore do?

A

Set out the requireemnts for each partner in terms of work they do for the business as well as roles of partners and any limits on authority.

50
Q

(g) The Partnership Agreement - The agreement or deed - 7) Decision Making What should the agreement do?

A

Deal expressly with decision making and management.

51
Q

(g) The Partnership Agreement - The agreement or deed - 7) Decision Making What is the position under PA?

A

All partnership decisions must be decided by a majority other than the following which require unammity:

  • Changes to nature of partnership business
  • Introducing a new partner
  • Varying rights and duties of partners
52
Q

(g) The Partnership Agreement - The agreement or deed - 8) Incoming Partners What is it advisable to do and why?

A
  • Under S27 unanimous consent of all partners required for a new partner to join.
  • Include expres provision in agreement reuqiring written consent of all partners for a new partner to avoid any doubt.
53
Q

(g) The Partnership Agreement - The agreement or deed - 9) Expulsion: What is the position under PA and what is therfore ESSENTIAL to do?

A
  • Partner cannot be expelled by majority vote unless all partners previously expressly agreed a majority can do this, so in absence of prior agreement, it is impossible to expel a partner unless they agree to their own expulsion.
  • Therfore, partners should agree expulsion provisions in adance, otherwise impossible to remove without disolving partnership.
54
Q

(g) The Partnership Agreement - The agreement or deed - 10) Partner Leaving What is the position if no partnership agreement or it is silent on partner leaving/retiring/termiantion?

A
  • The effect of them leaving is that the partnership is disolved - s26.
  • This is because partnership is a colective noun meaning all partnership so continuity is broken when there is a change in the identity of individuals who constitute it.
  • This is in most cases a techical dissolution (when partner leavees or new partner joints) which means new partnership formed by those who continue
  • Note - open to partners to apply to court to have old partnership wound up for sale of assets, etc.
55
Q

(g) The Partnership Agreement - The agreement or deed - 10) Partner Leaving What should be done to prevent disolution?

A

Agreement should state explicitly that new partnership will continue as between remaining partners and should contain how a partner can leave (including death) or be expelled without it being wound up.

It would usually include mechanism for remaining partners to buy out partners share.

56
Q

(g) The Partnership Agreement - The agreement or deed - 11) Non-complete clauses What is it common to include but what if not?

A
  • Common to contain express clause preventing CURRENT partners from competing with firm.
  • Implied by default under s30 which states if partner without consent of others, carries on bsuiness in same nature and competing, must account for all profits to firm.
57
Q

(g) The Partnership Agreement - The agreement or deed - 12) Restrictions of outgoing partners What may partners wish to do and is there provision in PA?

A
  • Partners may wish to put limitations on powers of outgoing partners to compete after leaving.
  • No defualt provision in PA.
58
Q

(g) The Partnership Agreement - The agreement or deed - 12) Restrictions of outgoing partners What type of restrictions can be provided for?

A
  • Non-compete clauses: to prevent former partner competing with business
  • Non-solicit clauses to prevent former partners soliciting business from clients
  • Non-dealing clauses to prevent former partners entering contracts with clients, former clients and employees.
59
Q

(g) The Partnership Agreement - The agreement or deed - 12) Restrictions of outgoing partners What ate these clauses known as?

A

Restraint of trade clauses and necesaary for protection of a legitmate business interest of a partnership, but only enforceable if reasonale in terms of duration, geographical area and scope.

60
Q

(h) Dissolution of Partnership: How can a partnership be dissolved under PA?

A

1) Automatic disollution subject to contrary agreement under:
* Expiry of fixed term
* Completion of specific venture
* Death or bankruptcy of partner
2) Dissolution of partnership by notice from any partnr and applies where no fixed duration.
3) Disolution by the court as a last resort.

61
Q

(h) Dissolution of Partnership: What happens on disollution?

A
  • Partnership relation ceases
  • Any partner may demand assets are realised
62
Q

(h) Dissolution of Partnership: What is undesirable and what is important to do?

A
  • Automatic disollution
  • Important to ensure agreement deals with when it may be disollved and the effect of this.
63
Q

(i) Collecting in and distrubting assets on the dissolution of partnership: What is the general position?

A

Subject to any written partnership agreement, where wound up, once all debts and liabilties paid, any money/assets left will be distrubred so each partner is paid back for original capital first.

64
Q

(i) Collecting in and distrubting assets on the dissolution of partnership: What will agreement commonly have?

A

Provision for dealing with proportion in which any surplus assets are to be shared following dissolution and this is known as asset surplus ratio (ASR).

65
Q

(i) Collecting in and distrubting assets on the dissolution of partnership: What is no agreed ASR?

A
  • If no agreed ASR then s44 applies in which assets shared in accordance with PSR.
  • If no PSR, then shared equally in accordance with S24.
66
Q

Limited Liability Partnerships - Introduction: What does it mean to be a hybrid vehicle?

A
  • LLP’s have elements of both a company in that legally it is a treated as a seperate legal eneity from its members s1(2) and therfore liabile for its own debts and can contract with TP’s.
  • And a partnership in that it is tax transparent.
67
Q

Limited Liability Partnerships - a) Applicable Legislation: What are the relevant acts?

A

Incorpored subject to LLPA which is supplemented by two statutory instrucments:

  • Limited liabiliy Partnership Regulations 2001 which deal with insolvency and internal governance of LLPs
  • Limited Liabiltiy Partnerships (application of companies Act 2006,) Regulations 2009 which govern the corporate law aspects of LLP’s with the 2009 regulations applying provisions of CA 2006 to LLP’s.

**Note - From this, can see LLP’s are primarly governed by company rather than partnership law framework. **

68
Q

Limited Liability Partnerships - b) Formation of an LLP: Who can incorporate an LLP?

A

S2(1) sets out two or more persons associated for carrying on a lawful business with view to profit can incorporate an LP. (Person can be a company as well as an individual and the word business requires some commercial activity s not usually used by non-profit organsations)

69
Q

Limited Liability Partnerships - b) Formation of an LLP - 1) Registration at companies house: What must subscribing members fill out?

A

Form LL IN01 to send to companies house with

  • Relevant fee and stating name
  • Registered offices address
  • Registered email address
  • Details of each member and those which are designated members (LLP requests at least two designated members to deal with CH filing requirements and signing accounts
  • Details of person with significant control
  • Statement of compliance
70
Q

Limited Liability Partnerships - b) Formation of an LLP - 2) Certificate of incorporation: What happens once registered?

A

Registrar of companies issues certificate of incorporation as conclusive evidence all legal requirements complied with and name of LLP entered on index of company names and given unqiue number.

71
Q

Limited Liability Partnerships - c) Continuing registration regime: What are LLP’s then required to continue to file at companies house?

A
  • Change of name
  • Change of registered office
  • Changes in members
  • Creation of a charge
  • Annual confirmation statement and
  • Accounts

In addition to filing at CH, LLP’s must maintain certain n house records including registers of its members and of its PSC’s.

72
Q

Limited Liability Partnerships - d) Members Who are the members?

A

Those subscribed to incorporation document and those who became members at later date with agreement of existing members.

73
Q

Limited Liability Partnerships - d) Members Who can be members?

A

S2(4) states that persons, not just individuals can be members of an LLP so this includes corporate bodies.

74
Q

Limited Liability Partnerships - d) Members What is the number of members requirement for LLP’s?

A

Must have at least two fromally appointed members at all time and no limit to maximum number.

75
Q

Limited Liability Partnerships - d) Members How many must be designated members?

A

At elast two and their obligations include signing accounts on behalf of members, making appropiate filings at companies house and acting on behalf of LLP if it is wound up.

76
Q

Limited Liability Partnerships - d) Members When will a member cease to be a member?

A

Under S4, they will cease under the following:
* their death
* Agreement with other members of LLP
* Giving notice to other members of LLP
* Dissolution

77
Q

Limited Liability Partnerships - d) Members Can a member also be an employee?

A

S4 LLP 2000makes clear that a partner in a partnership cannot be regarded as an employee as he would be employing himself.

78
Q

Limited Liability Partnerships - f) LLP Agreement: What is the different to companies and what does this mean?

A
  • No memorandum or articles of association.
  • LLPA and regulations do not lay down any particular management structure.
  • LLP’s have complete flexibility in terms of management.
79
Q

Limited Liability Partnerships - f) LLP Agreement: What must LLP’s therfore have?

A
  • An agreement which is often known as a members agreement to determine how issues dealt with by LLP and its members, similar to a partnership agreement.
  • This will be a private document setting out formal procedures and arrangeemnts which members have agreed to be basis of the operation of their business.
80
Q

Limited Liability Partnerships - f) LLP Agreement: Is there oblgiation for a formal members agreement and what if there is not?

A
  • Not obliged to have a formal members agreement to regulate the relationship.
    * In absence, the 2001 contain elevant default provisions in 7 and 8 but note any other gaps will not be filled by partnership law as Pa is disapplied in respect of LLPs.
81
Q

Limited Liability Partnerships - f) LLP Agreement: What are the 11 default provisions under reg 7 and 8?

A
  • Members share equally in capital and profits
  • An LLP must indemnify its members for payments made and personal liabilities incurred by them in ordianry and proper conduct of business
  • Every member may take part in management
  • No member is entitled to remuneration for managing an LLP
  • No person can become a member or assign their membership without consent of all existing members
  • Ordinary decision making may be by majority of members but any proposed change to nature of LLPs business requires consent of all members
  • Books and records of LP must be available for inspection by members at registered office
  • Each member must give true accounts and full information of all things affecting the LLP to any member of his legal represnetaitve.
  • If a member without consent carries on any business of the same nature as or competing with LLP then they must account for and pay over to LLP all profits made by them in business
  • Every member has duty to accountfor benefits drived from transactions with LLP and its business or property
  • There is no implied power of expulsion of a member by majority unless members have expressly provided for such power in members agreement.
82
Q
A

LLP separate legal entity, if one person decided to leave, it will continue.

If only 2 members and one leaves, then the LLP is allowed to drop to one designated members for up to 6 months before the sole member will become jointly and severally liable with LLP for an debts incurred after 6 month period – s4 LLP Act 2000.

83
Q

Limited Liability Partnerships - g) Taxation of LLPs What is the important dfference between LLP and a company?

A

For tax purposes, the LLP is treated as a partnership.

84
Q

Limited Liability Partnerships - g) Taxation of LLPs How will partners be tax?

A

Partners will be tazed as an individual and each liabile for income tax or capital gains tax on their share of LLP gains or income so it is transparent for tax purposes.

85
Q

Limited Liability Partnerships - g) Taxation of LLPs How is trade or business treated with the LLP

A

Carried on in partnership by the members and not LLP itself and assets held by LLP will be treated as being held by members as partners for capital gains tax purposes.

86
Q

Limited Liability Partnerships - g) Taxation of LLPs What is the position for LLPA and stamp duty?

A

LLPa gives relief from stamp duty where a partnership incorporated as an LLP and assets of partnership business are transferred to the LLP, subject to strict tax avoidance conditions.

87
Q

Limited Liability Partnerships - g) Taxation of LLPs What is the position for VAT?

A

LLP registered for VAT and not the members.

SQE - BLP (12 decks)

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