Partnerships and LLPs Flashcards
(40 cards)
Definition of partnership
A relationship between persons carrying on a business in common with a view to make a profit. (s1(1) PA 1890)
Need at least two people
Determining the existence of a partnership
- Profit sharing - prima facie evidence, especially if losses are shared as well
- All individuals take part in decision making
- Loan will not make a partnership
- Not being held out as a partner makes existence of partnership less likely
Advantages of using a partnership
- costs nothing to create
- no formalities or filing or disclosure requirements
- high degree of confidentiality
Fiduciary relationship in partnership
Overriding duty of good faith in a partnership.
Duty owed by the partners to one another is similar to that owned by a trustee to a beneficiary.
- Honest and full disclosure
- No unauthorised personal profit
- no conflict of duty or interest
Personal liability for partnership debts
No separate legal personality and liability is unlimited.
Contractual liability: every partner in the firm is liable jointly with the other partners for all the debts and obligations of the firm incurred whilst they are a partner.
Tortious liability: liability is joint and several in tort.
Liability of non-partners
New partners:
- new partner is not automatically liable in relation to any debts incurred before they joined
Former partners:
- a partner is still liable after they retire. May be able to novate the agreement with the consent of the creditor to release them
- May also become liable for partnership debts incurred after they left. A third party can treat all apparent partners as jointly liable to pay any debts unless the third party has been notified of the change by:
- Actual note - for those with actual dealings with the partner before departure
- Constructive notice (publication in the London Gazette) - for those who have not had actual dealing with the partner before departure.
Holding out (non-partner)
A non-partner may be personally liable on a partnership debt if they have held themselves out as a partner (or knowingly allowed themselves to be held out as one).
Elements:
(i) Representation to a third party to the effect that a person is a partner
(ii) the third party’s action in response (giving credit/supplying goods etc)
(iii) the third party’s state of mind (believing the representation)
Contracts binding partnership: content with agent’s acts
If partners are happy for firm to enter into the contract and have given actual, express or implied authority the firm will be bound.
If no authority the partners can ratify the agent’s acts and adopt the contract
Contracts binding partnership: not content with agent’s acts (partner)
- Partner binds firm against others’ wishes
- third party’s view of what is happening that matters
Will bind the firm if:
- the act is for carrying on business of the kind carried on by the firm
- the act is for carrying on such business in the usual way
Not be bound where:
- third party knew that the partner was not authorised to enter into the contract
- third party did not know or believe that the partner was a partner
Note: a partner who binds their firm without actual authority may be liable to the other partners for breach of contract
Contracts binding partnership: not content with agent’s acts (non-partner)
Common law rules of agency apply.
If has apparent authority they may still bind the firm.
Apparent authority: principal represents or permits a representation to be made to a third party that a person has authority to bind the firm.
Once the representation has been made to and relied on by the third party the principal is bound.
Taxation
Each partner is liable to tax as an individual on their share of the income or gains of the partnership. (tax transparency)
HMRC requires a partnership to make a single tax return of its profits.
Partners also submit their own tax returns and are liable to pay income tax and capital gains tax.
Income tax
Each partner is personally liable for the income tax on their share of the partnership profits
Unlike with other partnership liabilities a partner is NOT liable for the tax on other partners’ shares of the partnership profits.
Capital gains tax
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 profit sharing ration or equally if one is not agreed.
Partnership agreement
Most partnerships will have some form of express written partnership agreement. Will at a minimum cover:
- 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 (work and roles, decisions making, incoming partners, retirement, expulsions, non compete)
PA: commencement and duration
Useful an agreement to set out a date on which the partners agree that the particular rights an obligations contained in the agreement will commence.
May have a fixed term or may continue in accordance with the agreement
PA: name and place of business
Name must not:
- include ‘limited’ ‘ltd’ etc.
- be offensive
- the same as an existing trademark
- suggest connection to the government without permission
Should also set out the place of business and nature of the business
Partnership property
Each partner is deemed to own a share in the property belonging to the partnership.
Default: all property brought into the partnership in the course of business is partnership property.
All property bought with money belonging to the partnership is deemed to have been bought for the partnership.
Therefore, sensible to agree which assets are partnership property to minimise the potential for dispute later.
Shares in income and capital and profits and losses
Default: Partners are entitled to share equally in the capital and profits of the business and to contribute equally towards the losses of the business. (if contributed capital unequally can withdraw unequally).
Therefore very important there is an express provision setting out a profit sharing ratio.
Drawings/salary
Default: not entitled to salary and entitled to share equally in income profits.
Agreement should set out how much each partner may draw in a given period. It can also provide for a salary in addition to an income profit share.
Work input and roles; limits on authority
Default: every partner may take part in the management of the partnership business (but are not required to).
Agreement should therefore set out requirements for each partner in terms of the work they do for the business.
Should also set out any limits on authority.
Decision making
Default: decisions arising during ordinary course of the business are decided by a majority, except for any change to the nature of the business.
Agreement should deal expressly with decision making and management.
All partnership decisions must be decided majority other than following which require unanimity:
- changes to the nature of the partnership business
- introducing a new partner
- varying the rights and duties of partners
Incoming partners
Default: no person may be introduced without the consent of all existing partners
- usually this is a good idea, but also common to expressly provide for this
Expulsion
Default: a partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this.
- therefore in absence of express prior agreement, impossible to remove a partner without dissolving the partnership.
Partner leaving
Default: where no fixed term has been agreed for the duration of the partnership, it will be dissolved by any partner leaving
Most cases: technical dissolution - a new partnership is formed by the remaining partners who continue the business and does not lead to the winding up of the business.
Although any of the partners can apply to court to have the old partnership wound up.
PA should state explicitly that the partnership will continue as between the remaining partners and should contain details of how a partner can leave.
