Chapter 2: Partnerships

Question 1

1 Traditional partnerships

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). Sometimes partners may in fact be unaware that a partnership has arisen, where individuals have not taken legal advice and have started a business
together. Other individuals will seek legal advice prior to commencing their business and will ensure that a detailed partnership agreement is drafted in order to regulate the business and
affairs of the partnership

Question 2

1 Traditional partnerships

Answer 2

A partnership is not a legal entity separate from the partners themselves. The nouns
‘partnership’ and ‘firm’ are terms used to refer to all the partners collectively.
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.
Note that the term ‘partnership’ usually refers to a traditional partnership. Limited liability
partnerships are referred to as ‘limited liability partnerships’ or ‘LLPs’ which we will look at in a
later section.

Question 3

1.1 Formation of partnerships

Answer 3

There does not 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

Question 4

Evidence of profit-sharing

Answer 4

Evidence of profit sharing will be prima facie evidence of a partnership but not necessarily conclusive evidence (s 2(3) PA 1890). Case law provides that if there is an agreement to share losses as well as profits, this makes the existence of a partnership more likely

Question 5

Part of decision-making

Answer 5

If all individuals take part in decision making, this also makes it more likely that a partnership will be held to exist

Question 6

Loan does not create partnerships

Answer 6

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
Remember: Whether a partnership actually exists will be determined on the facts.

Question 7

1.2 Use of partnerships

Answer 7

In practice, you will sometimes find that clients ask for your help to avoid creating a partnership, rather than asking you to create one for them.
One reason is that the legislation governing partnerships, the PA 1890, is over 130 years old. The default provisions which are implied by that legislation are often unsuited to the modern business environment.
In addition, clients will have concerns about being subject to unlimited liability.

Question 8

Advantages of partnerships

Answer 8

Nevertheless, there are advantages to partnerships. For example, it costs nothing to create a partnership, because absolutely no formality is required

Question 9

No required formalities

Answer 9

There are also no required formalities for running a partnership and no filing or disclosure requirements, in contrast to companies which are heavily regulated. Conducting business through
a partnership therefore allows for a high degree of confidentiality regarding the business’s affairs.

Question 10

As many partnerships as companies

Answer 10

There are almost as many partnerships in the UK as there are companies and many of them are professional partnerships such as lawyers, accountants, surveyors and architects.
Many businesses start as partnerships before they convert to a limited company.

Question 11

1.3 Fiduciary relationship of partners to one another

Answer 11

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:

Question 12

Equitable Principles

Answer 12

1. Honest and full disclosure
2. Unauthorised personal profits
3. Conflict of duty and interest

Question 13

If creditor obtains judgement

Answer 13

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 14

1.4 Personal liability for partnership debts

Answer 14

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, nonpartners can also become personally liable.

Question 15

Contractual Liability

Answer 15

Jointly

Question 16

Tortious Liability

Answer 16

Jointly and several

Question 17

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

Answer 17

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 18

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

Answer 18

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:

Question 19

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

Answer 19

• 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 20

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

Answer 20

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).

Question 21

The elements required for s 14 PA 1890 to have effect are:

Answer 21

(a) A representation to a third party to the effect that a person is a partner;
(b) The third party’s action in response (‘giving credit to the firm’, eg by supplying goods or services to the firm); and
(c) The third party’s state of mind (‘believing (having faith in) the representation’).

Question 22

Liability incurred by non-partner

Answer 22

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 23

1.5 The relationship between the firm and outsiders: Contracts binding the
firm

Answer 23

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 24

1.5.1 Partners content with agent’s act (whether partner or non-partner)

Answer 24

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.

Question 25

1.5.1 Partners content with agent’s act (whether partner or non-partner)

Answer 25

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.

Question 26

1.5.1 Partners content with agent’s act (whether partner or non-partner)

Answer 26

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 27

1.5.2 Partners not content with agent’s act

Answer 27

The situation is more complex where the other partners are not content with the agent’s act. The situation is more complex where the other partners are not content with the agent’s act.

Question 28

Power of a partner to bind the firm against the others’ wishes: Section 5 PA 1890

Answer 28

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.

Question 29

Power of a partner to bind the firm against the others’ wishes: Section 5 PA 1890

Answer 29

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.

Question 30

Section 5 PA 1890

Answer 30

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.

Question 31

Following s 5 PA 1890 a partner’s unauthorised act will bind the firm if, viewed objectively:

Answer 31

* 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?’).

Question 32

The firm will not be bound, however, if:

Answer 32

* 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.

Question 33

Power of a non-partner to bind the firm against the partners’ wishes: Apparent authority at common law

Answer 33

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.

Question 34

Power of a non-partner to bind the firm against the partners’ wishes: Apparent authority at common law

Answer 34

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

Question 35

Power of a non-partner to bind the firm against the partners’ wishes: Apparent authority at common law

Answer 35

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.

Question 36

Holding out as a a partner

Answer 36

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 37

1.6 Taxation of partnerships

Answer 37

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).

Question 38

1.6 Taxation of partnerships

Answer 38

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 below.

Question 38

1.6.1 Income tax

Answer 38

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 39

1.6.2 Capital gains tax

Answer 39

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 PSR or, if there is no agreed profit sharing ratio (PSR) then equally in accordance with s 24(1) PA 1890.

Question 40

1.7 Summary

Answer 40

* A partnership can be formed without any legal formality. Furthermore, a partnership can be formed even without the specific intent of the parties to form one. * Partnerships are governed by the Partnership Act 1890. * Partnerships are not a separate legal entity to its partners. * Partners in a partnership have joint liability in contract (and potentially joint and several liability for partnership debts) and joint and several liability in tort.

Question 41

1.7 Summary

Answer 41

* When determining whether the firm is bound, s 5 PA 190 applies when a contract is purportedly formed by a partner. The common law of agency will apply if the person in question is not in fact a partner. * Conducting business through a partnership allows for a high degree of confidentiality regarding the business’s affairs. * Partnerships are tax transparent: the partners themselves pay income tax and capital gains tax on their share of profits and gains respectively.

Question 42

2 The partnership agreement

Answer 42

PA 1890 provides the framework for regulating traditional partnerships, but the statutory provisions are really ‘fall-back’ provisions in the absence of a partnership agreement, or where the agreement is silent on any matter. Other than ss 1 and 2 which regulate when a partnership comes into existence and ss 5 – 18 which determine the relationship between partners and third parties as well as liability for partnership debts, which you considered in the previous section, most of the sections of PA 1890 may be overridden by agreement.

Question 43

2 The partnership agreement

Answer 43

The partners’ mutual rights and obligations (under an agreement or under PA 1890) can be varied at any time by their unanimous consent (s 19 PA 1890), and this can be express or inferred from a course of dealing.

Question 44

2 The partnership agreement

Answer 44

The PA 1890 contains a default code which applies to relations between the partners themselves in the absence of any contrary agreement; whether written or oral, express or implied. 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. In this section we consider the clauses that should be considered for inclusion in such a partnership agreement, with reference to the fallback provisions of PA 1890 in each case.

Question 45

2.1 The partnership agreement or deed

Answer 45

Most partnerships will have some form of express written partnership agreement governing the way in which the partnership will be run. As a minimum, this will normally include provisions concerning the matters set out below:

Question 46

2.1 The partnership agreement or deed

Answer 46

* 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:

Question 47

2.1 The partnership agreement or deed

Answer 47

- Work input and roles; any limits on the authority of partners - Partnership decision making - Incoming partners - Retirement/expulsion of existing partners - Non-compete/other restrictions

Question 48

2.1 The partnership agreement or deed

Answer 48

We will review some of the most important clauses in partnership agreements, together with the default position under the PA 1890. Note that, as previously set out, the PA 1890 is over 130 years old and does not reflect modern business practice, so it is very likely that your clients will want to vary its terms.

Question 49

2.2 Common provisions in partnership agreement

Answer 49

2.2.1 Commencement and duration Although a partnership will commence when s 1(1) PA 1890 is satisfied, it is useful for the agreement to set out a date on which the partners agree that the particular rights and obligations contained in the agreement will commence. If the partners begin working together prior to the commencement date then the default provisions of PA 1890 will apply until the commencement date of the agreement.

Question 50

2.2.1 Commencement and duration

Answer 50

The agreement may have a fixed term or may continue until terminated in accordance with its provisions. If the agreement has a fixed term but the partners continue in business after the expiration of that term without entering into a new agreement, they are presumed to be partners on the same terms as before (s 27 PA 1890).

Question 51

2.2.2 Partnership name and place of business

Answer 51

The partnership name must not include ‘limited’, ‘ltd’, ‘LLP’, ‘public limited company’ or ‘plc’, be offensive, be the same as an existing trademark, contain a sensitive word or expression or suggest a connection with government without permission. The place of business should also be set out as well as the nature of the business

Question 52

2.2.3 Partnership property

Answer 52

As a partnership does not have a separate legal personality, each partner is deemed to own a share in the property belonging to the partnership. An individual partner does not have a right to any particular partnership asset. The default provisions of PA 1890 are set out below.

Question 53

2.2.3 Partnership property

Answer 53

Section 20 PA 1890 provides that all property brought into the partnership whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property. Section 21 PA 1890 provides that all property bought with money belonging to the firm/partnership is deemed to have been bought on account of the firm/partnership, unless the contrary intention is shown

Question 54

Partnership property (ss 20 – 21 PA 1890)

Answer 54

Whether or not a particular asset is partnership property is a question of fact, depending on the intentions of the partners at the time they acquire it. This subjective element can be difficult to prove, so it is sensible for partners to agree which assets are partnership property to minimise the potential for dispute later

Question 55

2.2.4 Shares in income and capital and profits and losses

Answer 55

The default provisions of PA 1890 provide, subject to any agreement express or implied between the partners, that all partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses of the business. This is the case even where the parties have contributed to the capital unequally.

Question 56

2.2.4 Shares in income and capital and profits and losses

Answer 56

Often, the default provisions will not accord with the partners’ wishes therefore it is extremely important that there is an express provision in the agreement setting out a PSR, although if the partners have contributed capital unequally there might be an implied agreement that they are entitled to withdraw their capital unequally. This will not affect the capital profits been shared equally unless there is a specific agreement to that effect

Question 57

Capital and profits (s 24(1) PA 1890)

Answer 57

Partners are entitled to share equally in the capital and profits of the business, and to contribute equally towards the losses (whether capital or otherwise) of the business

Question 58

2.2.5 Drawings/salary

Answer 58

Partners own the business and may take ‘drawings’ of income profits. The partnership agreement should set out how much each partner may draw in any given period. In the absence of agreement, s 24(1) provides that all partners are entitled to share equally in income profits. In some partnerships, the partners may intend that each receives a salary in addition to income profit share. This must be expressly set out in the agreement as the default position is that there is no entitlement to salary

Question 59

Remuneration (s 24(6) PA 1890)

Answer 59

Without an agreement a partner is not entitled to a salary.

Question 60

2.2.6 Work input and roles; limits on authority

Answer 60

Under PA 1890, every partner may take part in the management of the partnership business (s 24(5)) but are not required to do so. The partnership agreement should therefore set out the requirements for each partner in terms of the work they do for the business. Commonly, the agreement will state that all partners must devote the whole of their time and attention to the business. The roles of partners and any limits on their authority should also be clearly defined.

Question 61

Management (s 24 PA 1890)

Answer 61

Every partner may take part in the management of the partnership business.

Question 62

2.2.7 Decision making

Answer 62

Decisions arising during the ordinary course of the business are decided by a majority, except for any change to the nature of the partnership business.

Question 63

2.2.8 Incoming partners

Answer 63

Under s 24(7) PA 1890, the unanimous consent of all partners is required for a new partner to join the partnership. Whilst this may be what the partners themselves want, it is still 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

Question 64

New partners (s 24 PA 1890)

Answer 64

No person may be introduced as a partner without the consent of all existing partners.

Question 65

2.2.9 Expulsion

Answer 65

Under PA 1890, a partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this. This effectively means that in the absence of prior agreement, it is impossible to expel a partner, unless they agree to their own expulsion (highly unlikely).

Question 66

2.2.9 Expulsion

Answer 66

Under PA 1890, a partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this. This effectively means that in the absence of prior agreement, it is impossible to expel a partner, unless they agree to their own expulsion (highly unlikely). The partners should therefore agree expulsion provisions in advance, otherwise it will be impossible to remove a partner without dissolving the partnership.

Question 67

Expulsion (s 25 PA 1890)

Answer 67

A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this.

Question 68

2.2.10 Partner leaving

Answer 68

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 (s 26 PA 1890). This is because ‘partnership’ is a collective noun meaning ‘all the partners’, so the continuity of a partnership is broken when there is a change in the identity of the individuals who constitute it

Question 69

2.2.10 Partner leaving

Answer 69

In most cases this is a ‘technical dissolution’. This means that a new partnership is formed by the remaining partners who continue the business. However, it is open to any of the partners to apply to court to have the old partnership wound up (ie sale of the assets for the repayment of the partnership debts and for the distribution of the assets or liabilities amongst the partners).

Question 70

To prevent dissolution

Answer 70

To prevent dissolution when a partner retires, 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 (which may include a provision in the event of death) or be expelled without the partnership being wound up. This would usually include a mechanism for the remaining partners to buy out a departing partner’s share and for calculation of the value of such share.

Question 71

Automatic dissolution (s 26 PA 1890)

Answer 71

Where no fixed term has been agreed for the duration of the partnership, the partnership will be dissolved by any partner leaving

Question 72

2.2.11 Non-compete clauses

Answer 72

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 which states that if a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, they must account to the firm for all profits made by them in that business. Duty not to compete with the firm (s 30 PA 1890)

Question 73

2.2.12 Restrictions on outgoing partners

Answer 73

The partners may wish to also put limitations on the powers of outgoing partners to compete with the partnership after leaving. There are no such default clauses in PA 1890. Restrictions on outgoing partners can be provided for in the partnership agreement by using any of the following: * Non-compete clauses: to prevent former partners competing with the business; * Non-solicit clauses: to prevent former partners from soliciting business from the partnership’s clients; * Non-dealing clauses: to prevent former partners from entering into contracts with clients, former clients or employees of the partnership

Question 74

2.2.12 Restrictions on outgoing partners

Answer 74

These types of clauses are known as restraint of trade clauses and are necessary for the protection of a legitimate business interest of the partnership and will only be enforceable if they are reasonable in terms of duration, geographical area and scope.

Question 75

2.3 Dissolution of partnership

Answer 75

A partnership can be dissolved (terminated) in a number of ways under PA 1890 as follows: * By automatic dissolution (subject to contrary agreement) under: - Expiry of a fixed term (s 32(a)) - Completion of a specific venture (s 32(b)) - Death or bankruptcy of any partner (s 33)

Question 76

2.3 Dissolution of partnership

Answer 76

* By dissolution of partnership by notice from any partner (ss 26 and 32(c)). This applies where the partnership has no fixed duration; * By dissolution of partnership if the partnership business becomes unlawful (s 34); or * By dissolution by the court as a last resort (s 35).

Question 77

2.3 Dissolution of partnership

Answer 77

If an event occurs which causes a partnership to be dissolved, the partnership relationship ceases, and any partner may demand that the assets of the business are realised. Since automatic dissolution is undesirable, it is important to ensure that the partnership agreement deals with when a partnership may be dissolved and the effect of this, as detailed earlier in this section in the discussion on partners leaving

Question 78

2.4 Collecting in and distributing assets on the dissolution of a partnership

Answer 78

Subject to any written partnership agreement, where a partnership is wound up, once all debts and liabilities have been paid, any money/assets left will be distributed so that each partner is paid back their original capital first (s 44(b)(3) PA 1890). It is common for a partnership agreement to have a provision dealing with the proportion in which any surplus assets are to be shared out following dissolution. This is called the asset surplus ratio or ‘ASR’.

Question 79

2.4 Collecting in and distributing assets on the dissolution of a partnership

Answer 79

If there is no agreed ASR then s 44(b)(4) PA 1890 applies, and surplus assets are shared in accordance with the agreed profit share ratio (PSR). If there is no PSR then the surplus assets are shared equally in accordance with s 24(1) PA 1890

Question 80

2.5 Summary

Answer 80

* Partners are strongly advised to set out their rights and obligations in an express written partnership agreement. * If the partners do not sign a partnership agreement, or if the partnership agreement is silent, the PA 1890 contains default provisions on a number of matters. These include:

Question 81

2.5 Summary

Answer 81

- Commencement and duration - Partnership property - Shares in income and capital and profits and losses - Drawings and salary - Decision making - Incoming partners - Expulsion, retirement and the effect of a partner leaving

Question 82

2.5 Summary

Answer 82

* A partnership may be dissolved automatically in certain circumstances or by notice. The agreement should contain provisions dealing with dissolution and the collection and distribution of assets.

Question 83

3 Limited Liability Partnerships (LLPs)

Answer 83

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).

Question 84

3 Limited Liability Partnerships (LLPs)

Answer 84

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.

Question 85

3 Limited Liability Partnerships (LLPs)

Answer 85

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 86

3.1 Commercial uses for LLPs

Answer 86

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).

Question 87

3.1 Commercial uses for LLPs

Answer 87

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 88

3.2 Applicable legislation

Answer 88

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.

Question 89

3.2 Applicable legislation

Answer 89

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 1986 (fraudulent trading), s 214 IA 1986 (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.

Question 90

3.3 Formation of an LLP

Answer 90

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.

Question 91

3.3.1 Registration at Companies House

Answer 91

The subscribing members fill out a 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 and which members, if not all of them, are to be designated members (s 2(2) LLPA).

Question 92

3.3.2 Certificate of Incorporation

Answer 92

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 unique number.

Question 93

3.4 Continuing registration regime

Answer 93

Once registered, LLPs are obliged to continue to file information with Companies House as follows: * Change of name; * Change of registered office; * 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)

Question 94

3.4 Continuing registration regime

Answer 94

In addition to its obligations to file information at Companies House, an LLP must maintain certain in-house records, including registers of its members and of its ‘people with significant control’ (‘PSCs’ who are, broadly speaking, those with a more than 25% interest in the LLP or have significant influence or control over the LLP).