Business 2 Flashcards
(27 cards)
What is a partnership according to s1 Partnership Act 1890?
A partnership comes into existence when 2 or more persons are carrying on a business in common with a view of profit.
What parts of the Partnership Act 1890 cannot be overriden by agreement?
When a partnership comes into existence.
The relationship between the partners and third parties and liability for debts.
Working as a partnership outside the duration specified in the agreement?
If they fit the definition of partnership before the commencement date in the agreement, the partnership is governed by the 1890 Act until the commencement date.
If they continue to act as a partnership beyond the fixed term in the agreement, it is assumed that they carry on under the same terms as before.
Non-compete clauses
Will be implied by the PA 1890 even if no express agreement.
Where does the Act stand on holiday entitlement, sickness, maternity and paternity provisions?
It does not have any default provisions on it and therefore should be set out in the agreement.
What decisions must be made by majority and what must be made unanimously?
All decisions must be made by majority with 3 exceptions:
1. changing the nature of the business
2. introducing a new partner
3. changing the terms of the partnership agreement.
Can include in their agreement if they decide that other decisions must be made by unanimous agreement.
Shares in income and capital profits and losses
Default position in the Act is that all partners share income and capital equally.
If they wish to share income or capital unequally (common if they contributed different amounts initially) then they should provide provision for this.
Expulsion
Under default provisions, can only do this if all the partners agree (including the one being expelled).
Will have to include in the agreement if the others are allowed to expel a partner by majority.
Expulsion clauses can exist to allow a partner to be expelled if they have conducted themselves in a certain way (often poor performance).
Dissolution and partial dissolution
The default provision is that any partner may end the partnership at any time by giving notice of their intention to do so to all the other partners.
Important to make provisions for partial dissolution. Without this, an outgoing partner can rely on the Act to insist that the business be sold when they leave.
An outgoing partner is entitled to an interest of 5% pa on the value of their share until they receive their share or a sum by court order representing their share of the profits made.
Advisable to provide for instalments so the partners do not lose their business paying out the leaving partner.
Goodwill
When business sold as a going concern, can include the goodwill as part of the purchase price. Difficult to value but usually 2 years’ profit is taken as value of the goodwill.
If assets are being sold individually to be used elsewhere, goodwill will not be part of the equation.
Advisable to include provision on allowing the partners time to find a buyer before selling assets individually so it is more likely to be sold as a going concern and goodwill can be included in the price.
Distribution of proceeds of sale
Under s44 the following happens unless otherwise agreed:
- First the creditors are paid in full (if a shortfall, partners must pay using private assets)
- Secondly, partners who have loaned money to the firm must be repaid outstanding amount plus interest
- Thirdly, partners must be paid the share of the partnership’s capital to which they are entitled
- Finally, any surplus is shared between the partners in accordance with the terms of their agreement.
Any partner can act in the winding up of the business affairs unless they are bankrupt or dead in which case they can get the trustee in bankruptcy or PR to make application.
Partnership duties
Under common law, owe a duty to act with utmost fairness and good faith towards one another.
In the Act:
- must be completely open with one another regarding relevant information about the partnership
-must account to the firm for private profits they have earned without the others’ consent from any transaction concerning the partnership
- must not compete with the firm.
S24 responsibilities
Partners must:
- bear a share of any loss of the business in accordance with partnership agreement terms
- indemnify fellow partners who have borne more than their share of any liability connected with the partnership.
Actual authority
May be authorised in different ways:
- partners acted jointly in making the contract
- express actual authority
- implied actual authority (done it in the past without objection).
Apparent authority
- the transaction is one that relates to business of the kind carried on by the firm
- the transaction is one which a partner in the firm would usually be expected to have the authority to act
- the other party did not know that the partner did not have authority to act
- the other party knows or believes the other is a partner.
Personal liability resulting from apparent authority
All the partners are liable to the third party under the contract. The partner that acted with apparent authority is liable to indemnify the other partners for their loss because they have acted without actual authority.
Liability in tort
The firm is liable for the wrongful acts or omissions of their partners acting in the ordinary course of business or acting with authority from their partners.
Partner liability for partnership debts
Each partner is jointly liable for debts incurred by the partnership when they were a partner.
Court able to order a person to contribute to the judgement debt of another.
Novation agreement
Allows a retiring partner to be released from an existing debt by entering into a contract with the creditor and other partners.
Releases the partners from liability and instead the newly constituted firm will be liable.
When there is no new partner taking place, some consideration must exist or the contract must be executed as a deed.
Liability for debts after leaving the partnership
Will remain liable for debts incurred while there however will escape liability for debts incurred afterwards as long as complied with the conditions of s36:
- anyone who had dealings with the firm before must have been given actual notice of the partner leaving
- ‘notice to the whole world’ must be given by way of the London Gazette.
Their estate will not be liable for debts incurred afterwards if they left due to bankruptcy or death.
Holding out
A creditor will be able to hold a former partner liable to an outstanding debt if they relied on a representation that they were still a partner to the firm.
The former partner must ensure that s36 was complied with and that there is no mention of them on the firm’s website or headed paper etc in order to protect them from holding out.
Creditor will be able to hold them liable if they can establish that they held themselves out or let themselves be held out, they relied on that representation and then gave credit to the firm as a result.
Leaving partners ‘leaving in’ their share of the outstanding liabilities
Leaving partners often do this, leaving in their share of the outstanding liabilities in the partnership bank account when they leave.
So that when a creditor sues them all jointly for this (including the former partner) he can then be indemnified by the other partners for the share that he left in the bank account when he left.
Legal requirements of an LLP: members
Must have 2 members on incorporation.
Can cease to be designated members at a later date if they decide.
If at any point the number of members reduces to 1, and this carries on for 6 months, then that person will be jointly and severally liable for any LLP debts incurred during the 6 month point onwards.
LLP incorporation and name
Started by filling an LL IN01 at Companies House along with the fee.
Companies House will then issue the certificate of registration.
LLP must have its name on the outside of its place of business and its stationary must state its name, place of registration and registration number.
Required to have an appropriate email address where emails sent by the registrar would be expected to come to the attention of a person acting on behalf of the LLP.
