2 - Partnerships and LLPs Flashcards
(37 cards)
What is a Partnership?
A relationship between two or more persons carrying on a business in common with a view to making profit. The PA 1890 does not distinguish between actual and legal persons, so a company can be a Partner.
There does not have to be intention on the part of the parties to be, or form, a partnership
It is NOT a legal entity separate from the partners themselves.
Whether a partnership exists will be determined on the facts.
Which rules determine the existence of a partnership?
Section 2 PA 1890:
- Evidence of profit sharing will be prima facie evidence of a partnership. Case law shows that an agreement to share losses as well as profits increases the likelihood of a partnership.
- If all individuals take part in decision making, this makes it more likely that a partnership exists.
Less likely:
- A loan does not create a partnership.
- If not being ‘held out’ as a partner, a partnership is less likely.
Advantages and disadvantages of partnerships
Advantages:
- No formality is required to create or run a partnership.
- Cost-effective: Partnerships cost nothing to create compared to companies.
- Confidentiality: No filing or disclosure requirements allow for greater privacy in business affairs.
- Flexibility: Fewer regulatory obligations compared to companies.
Disadvantages:
- Unlimited liability: Partners are subject to unlimited liability for business debts, which can be a significant concern.
- Outdated legislation: The governing law, PA 1890, is over 130 years old and its default provisions are often unsuited to modern business needs.
- No limited liability protection: Unlike companies, partners risk their personal assets in case of business failure.
What relationship and duties do partners have to one another?
There is an overriding duty of good faith in a partnership, reflected in the PA:
- Honest and full disclosure (s28)
- Unauthorised personal profit (s29)
- Conflict of duty and interest (s30)
What type of liability do partners have in relation to partnership debts?
Personal liability: Partners are personally liable for contracts binding the firm because a partnership has no separate legal personality.
Contractual liability (s 9 PA 1890): All partners are jointly liable for debts and obligations incurred by the firm while they are partners, e.g., overdue rent.
Tortious liability (ss 10 and 12 PA 1890): Partners are jointly and severally liable for torts committed by the firm. Each partner can be sued individually or together with others.
Civil Liability (Contribution) Act 1978: Even if one or more partners are sued, other partners remain liable, as liability is joint and several under this law.
What is the liability of non-partners in a partnership?
New Partners (s 17 PA 1890):
New partners are not automatically liable for debts incurred before they joined (s 17(1)).
Retired partners remain liable for debts incurred while they were a partner (s 17(2)).
To discharge liability after retirement, a novation agreement with creditor consent is required (s 17(3)).
Former Partners (s 36 PA 1890):
A former partner may be liable for new debts unless third parties are notified of their departure.
Actual notice is required for those who had prior dealings with the partner (s 36(1)).
Constructive notice (published in the London Gazette) is sufficient for those who did not have prior dealings (s 36(2)).
No liability exists for third parties who did not know the former partner prior to departure.
What is the liability of non-partners under the ‘holding out’ principle (s 14 PA 1890)?
Under s 14 PA 1890, a non-partner can be personally liable for partnership debts (not the firm) if they are “held out” as a partner. The required elements are:
- Representation: A non-partner represents themselves or knowingly allows themselves to be represented as a partner.
- Third Party Action: A third party provides credit to the firm (e.g., supplying goods or services) based on that representation.
- Third Party Belief: The third party believes in the representation that the person is a partner.
How is the partnership bound by contracts made on its behalf by partners and non-partners?
Partners: Under s 5 PA 1890, partners are treated as agents of the firm and can bind the partnership by contracts made on its behalf. The common law of agency also applies if s 5 is not relevant.
Non-partners: The common law of agency applies, but s 5 PA 1890 does not. The partnership may only be bound if the non-partner had authority under agency law principles.
What happens if the partners in a partnership are content with an agent’s actions, regardless of their authority at the time?
If all partners are content with the contract entered into by an agent (partner or non-partner) and have given actual, express, or implied authority, the firm will be bound.
Even if the agent lacked authority at the time, the partners can ratify the agent’s act and adopt the contract by either expressly approving it or by performing it.
Under what conditions can a partner bind the firm against the other partners’ wishes under s 5 PA 1890?
Under s 5 PA 1890, a partner’s unauthorised act will bind the firm if:
- The act is for carrying on the kind of business the firm usually conducts.
- The act is for carrying on business in the usual way.
However, the firm will not be bound if:
- The third party knew the partner lacked authority.
- The third party did not know or believe the person was a partner.
A partner who binds the firm without authority may be liable to the other partners for breach of contract.
How can a non-partner bind a firm against the partners’ wishes under the common law rules of apparent authority?
At common law, a non-partner can bind a firm through apparent (ostensible) authority if:
- The firm (principal) represents or permits a representation to a third party that the person has authority.
- The third party relies on that representation.
E.g., Holding out a non-partner as a partner, such as by continuing to use their name after they leave the firm.
How are Partnerships taxed?
Tax transparent: Each partner is taxed individually on their share of partnership income or gains. The partnership itself does not pay tax but must submit a single tax return to HMRC.
Income Tax: Each partner is personally liable for tax on their own share of profits. No joint/several liability for other partners’ tax.
Capital Gains Tax: Partners are treated as owning a fractional share of assets. On disposal (sale, transfer or exchange of the asset), each partner is taxed on their share of the gain. Fractional share based on the Profit Sharing Ratio (PSR - ratio agreed by partners), or equally if no PSR is agreed (s 24(1) PA 1890).
What does the Partnership Act 1890 (PA 1890) cover and how can its provisions be altered?
Provides default rules for partnerships. Statutory provisions are really ‘fall-back’ provisions in the absence of a partnership agreement, or where the agreement is silent on any matter.
Partners can alter statutory provisions with their own partnership agreement. Changes require unanimous, and this can be express or inferred from a course of dealing. (s 19 PA 1890).
Most traditional partnerships will have a formal written partnership agreement, which will set out the terms on which the partners have agreed to run the business and override default rules contained within the PA.
What should be included in a partnership agreement regarding commencement and duration, and what is the role of the Partnership Act 1890 (PA 1890) in these aspects?
Commencement Date: Define when the agreement’s terms start. If partners work together before this date, the default provisions of PA 1890 apply.
Term: Can be fixed or indefinite; if a fixed term ends but business continues without a new agreement, the same terms are presumed (s 27 PA 1890).
What are the requirements for a partnership name and what should the agreement include about the place of business?
Must not include ‘limited,’ ‘ltd,’ ‘LLP,’ ‘plc,’ be offensive, duplicate a trademark, use sensitive words, or imply government affiliation without permission.
Place of Business: Specify the business location and nature of the business in the partnership agreement.
How is partnership property defined and handled under PA 1890?
Definition: All property brought into the partnership for its purposes or bought with partnership funds is deemed partnership property (ss 20-21 PA 1890).
Partnership Agreement: Should specify which assets are considered partnership property to avoid disputes, as ownership is based on the intentions of the partners.
Default Provisions (PA 1890):
s 20: Property brought into the partnership or used for partnership business is partnership property.
s 21: Property purchased with partnership funds is presumed to be partnership property unless proven otherwise.
It is sensible for partners to agree which assets are partnership property to minimise the potential for dispute later.
How are shares in income, capital, and profits determined under PA 1890, and what should a partnership agreement include?
Default Provision (PA 1890): Partners share equally in capital, profits, and losses, regardless of their capital contributions.
Profit Sharing Ratio (PSR): If partners wish to vary from the default, they should specify an express PSR in their partnership agreement.
Implication: Unequal capital contributions might imply an unequal withdrawal of capital but default sharing remains equal unless agreed otherwise.
How are drawings and salaries handled in a partnership?
Drawings: The agreement should set out the amount each partner may draw periodically. By default, all partners share income profits equally (s 24(1) PA 1890).
Salaries: If partners are to receive a salary in addition to their profit share, this must be expressly stated in the agreement as the default is no entitlement to a salary.
Remuneration: Without an agreement a partner is not entitled to a salary.
How are work input, roles, and authority limits addressed in a partnership?
Work Input: Under PA 1890, partners may participate in management but are not required to. The partnership agreement should specify each partner’s work requirements and expectations. Commonly, agreements require partners to dedicate their full time and attention to the business.
Roles and Authority Limits: The agreement should clearly define partners’ roles and any limits on their authority to ensure clarity and prevent disputes.
Management: Every partner may take part in the management of the partnership business.
How should decision-making processes be addressed in a partnership agreement?
Default Rule: Ordinary business decisions are made by majority vote. Unanimous consent is required for changing the business nature, introducing new partners, or varying partners’ rights (s 24 PA 1890).
Partnership Agreement: Should clearly outline these decision-making processes and any exceptions.
What does PA 1890 say about admitting new partners, and how should this be handled in a partnership agreement?
Default Rule: A new partner cannot join without the unanimous consent of all existing partners (s 24(7) PA 1890).
Partnership Agreement: It is advisable to include an express clause requiring written consent of all partners for a new partner to join the partnership, to avoid any doubt as to whether consent was in fact given.
What provisions regarding the expulsion of partners should be included in a partnership agreement?
Default Rule: A partner cannot be expelled by majority vote unless all partners have previously agreed to this procedure (s 25 PA 1890).
Partnership Agreement: Should include clear expulsion provisions to allow for removal without dissolving the partnership.
What happens if a partner leaves, and how should a partnership agreement address this?
Default Rule: The partnership is automatically dissolved if a partner leaves (s 26 PA 1890 automatic dissolution).
Note that if one partner leaves a partnership of two partners, the remaining “partner” becomes a sole trader.
In most cases, this is called a ‘technical dissolution’. This means that a new partnership is formed by the remaining partners who continue the business and does not lead to the winding up of the business.
Partnership Agreement: To prevent dissolution, the partnership agreement should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave, and specify arrangements for continuity or dissolution.
How are non-compete clauses handled in a partnership agreement?
Default Rule: Partners, who carry on any business of the same nature as and competing with that of the firm, must account for profits from competing businesses (s 30 PA 1890).
Partnership Agreement: Should include clauses preventing partners from competing with the firm and, potentially, post-retirement restrictions to protect business interests. There are no such default clauses in PA 1890.
Incl, non-compete, non-solicit, and non-dealing clauses.
