Chapter 6

Question 1

Sole trader

Answer 1

A person who owns and runs a business they provide the capital and earn the profits or suffer the losses of the busines. The business is not a speedster legal entity to the owner

Question 2

Advantages of sole trader

Answer 2

No formal set up process required
Independence, privacy
Personal supervision
Profits accrue to sole trader

Question 3

Disadvantages of sole trader

Answer 3

Unlimited liability for loses of the business
Reliance on the individual results in long hours
Succession issues
Skill of trader
Usually small so struggles with funding expansion etc

Question 4

Ordinary partnerships

Answer 4

The relation which subsists between persons, carrying on a business in common with a view of profit

Question 5

‘Between person’ partnership

Answer 5

Person include companies. There must be at least two partners

Question 6

‘Carrying on business’ partnership

Answer 6

includes every trade, occupation or profession
It can be a single transaction. The business must involve some activity. Eg not holding property
A partnership begins when the agree to conduct their business activity together which may well be before the business actually begins to trade.

Question 7

‘With a view of profits ‘ parenterhsip

Answer 7

the test is one of intention so if partners intent to make a profit but make a loss it’s still a partnership.

However if it’s to gain experience for example then it’s not a partnership

Question 8

How are partnerships formed

Answer 8

By a formal partnership deed which sets out the terms of the agreement between the partners. However no such formality is required. Where there is no express agreement the basic rights and duties of the partners described in the partnership act 1980 applies

Question 9

Partners owe fiduciary duties to the partnership these are

Answer 9

To act in good faith
Not to Excersise a legal right for an improper motive
Not to keep profits derived from the partnership without consent of the other partner
To avoid conflict of interest without full disclosure

Question 10

Provisions of the partnership act

Answer 10

Profits and loss
Capital deficiency
Management
Change in business

New partners
Variation
Indemnity
Remuneration

Question 11

Profit and losses Provisions of the partnership act

Answer 11

Shared equally in the since on contract agreement.

Question 12

Capital deficiency Provisions of the partnership act

Answer 12

Remaining partner share a capital deficiency. (What a partnership owed bus cannot pay back) not as a loss but in ratio to the amounts of capital which they originally contributed to the firm

Question 13

Management Provisions of the partnership act

Answer 13

Every partner is entitled to take part in managing the firms business ordinary management decisions can be made by a majority of partner

Question 14

Change in business Provisions of the partnership act

Answer 14

Any decision on changing the nature of the partnerships business must be unanimous

Question 15

New partners Provisions of the partnership act

Answer 15

New partners must only be introduced with the unanimous content of existing partner

Question 16

Variation Provisions of the partnership act

Answer 16

The partnership agreement may be varied with the consent of all the partners

Question 17

Indemnity Provisions of the partnership act

Answer 17

The firm must indemnify any partner against liabilities incurred in the ordinary and proper conduct of the partnership business or in doing anything necessarily done for the preservation of the partnership property or business

Question 18

Remuneration Provisions of the partnership act

Answer 18

No partner is entitled to remuneration for acting in the partnership business

Question 19

Interest on capital Provisions of the partnership act

Answer 19

None is paid on capital gains accept by agreement however a partner is entitled to 5% interest on advances

Question 20

Records and accounts Provisions of the partnership act

Answer 20

These must be kept at the main place of business and must be open to inspection by all partners

Question 21

Expulsion Provisions of the partnership act

Answer 21

A partner may only be expelled by a majority of votes when the partnership agreement allows even then the power must only be used in good faith and for good reason

Question 22

Dissolution Provisions of the partnership act

Answer 22

The authority of the partners after dissolution continues so far as is necessary to wind up the partnership affairs and complete transactions already begun. In dissolution, any partner can insist on realisation of the firms assets, payment of the firms debts and distribution of the surplus

Question 24

Partners liability and authority

Answer 24

Partners are jointly and severally liable in so far as they bind in the firm

Question 25

Rule 1 of partners liability and authority

Answer 25

Each partner os the agent of the partnership and his fellow partners for the purpose of business if the partnership unless: He has no authority to act for the firm in the particular matter The person with whom he is dealing either knows that he has no authority or doesn’t know it belive him to be a partner If any restrictions is placed on a partner authority to bind the firm, no act done in contravention of that restriction is binding on the firm where the third party has notice of the restriction. The perception of the third party is key here

Question 26

Rule 2 of partners liability land authority

Answer 26

Where a partner pledged the credit of the firm for a purpose which has no apparent connection with the firms ordinary business the firm will not be bound unless he has actual express authority to go do do

Question 27

Rule 2 lia

Question 28

Debts incurred before partner joined

Answer 28

Note that a new partner admitted that of an existing firm is liable for debts incurred only after he becomes a partner

Question 29

Debts incurred whilst he is a partner

Answer 29

The partner is liable for the debts incurred whilst he is a partner even after he has left the firm. He may agree with his continuing partners that they should indemnify him for these debts or he may negotiate a release with the creditor

Question 30

Debts which incurred after partner leaves firm

Answer 30

The liability of the partnership for acts before he retired is not affected by that partners retirement He is also liable for debts of the firm incurred after his retirement if the creditor knew him to be a partner and had not had notice of retirement Therefore it is vital on retirement that a partner gives notice to all the creditors of the firm

Question 31

The partnership act 1890 provides that a partnership is dissolved in the following instances

Answer 31

-the death or bankruptcy of a partner, although it is usual for the partnership agreement to override this -Expiry of a fixed term -Completion or termination of a single joint venture if applicable -Subsequent illegality -Notice given by a partner if it is a partnership of indefinite duration -All of the court, for example where it is deemed just an equitable to do so

Question 32

Limited liability partnerships

Answer 32

Hybrid between company and partnership Key point is that it has a seperate legal personality so have the benefit of limited liability in the same way to the members of the company

Question 33

Formation of LLP

Answer 33

The incorporation document must be submitted to the registrar of companies. The following information must be given -name of LLP -Location. Of registered office -address of said office -names and addresses of all members of LLP -names of 2 designated members who are to be responsible for signing notices and accounts -registration fee

Question 34

Partnership agreement

Answer 34

An LLP is not required to have a formal partnership agreement dealing with matters of internal regulation and duties owed by the partners to eachother. Any such agreement doesn’t have to be filed with the registrar. In the absence of any express agreement to the contrary the provision of the act and the limited liability partnership regulation 2001 will apply These regulations apply the provisions of companies legislation to LLP and also default provisions in line with the partnership act dealing with profit share remuneration inspection of books and expulsion

Question 35

Regulation of LLP

Answer 35

An LLP must keep and retain accounting records to companies with a few minor modifications Special rules for small and medium sized LLPs and audit exemption rules apply as they do to companies. There is no requirement to provide the equivalent of a directors report An LLP must maintain a register of charters with the registrar To notify the registrar of any change to membership designated member or registered office within 14 days To provide the name of the LLP on correspondence and outside its place of business To deliver a confirmation statement to registrar As in the case of companies turners of an LLP may apply to the court in cases of unfair prejudice although this right can be excluded with unanimous consent for an agreed period A member may be found guilty of fraud or liable to disqualification in the same way the director of a company can

Question 37

Partnership act provides that each member is an agent of the LLP and therefore has the power to bind the LLP by his acts. However the LLP will not be bound where

Answer 37

The member doesn’t have authority The third party is aware he does not have authority or doesn’t know or belive him to be a member of the LLP

Question 38

Dissolution of an LLP

Answer 38

Can be dissolved by unanimous agreement of the partners and following a formal procedure for winding up Where the LLP becomes insolvent, members of the LLP may propose a voluntary arrangement, apply to put the business into administration or resolve to go into voluntary or compulsory liquidation

Question 39

Differences to wind up LLP in comparison to companies

Answer 39

Withdrawals made by members within two years prior to winding up may be clawed back if it can be shown that the member at the time knew or had reasonable grounds to believe the LLP would become insolvent On a winding up past and present members may be required to contribute to the assets of the LLP to the extent that they have agreed to do so in any LLP agreement