Topic 3: Partnerships And LLPs

Question 1

What governs traditional partnerships in the UK?

Answer 1

The Partnership Act 1890 (‘PA 1890’)

This act outlines the formation, operation, and liabilities of partnerships.

Question 2

How is a traditional partnership defined according to s 1(1) PA 1890?

Answer 2

A relationship between persons carrying on a business in common with a view to making a profit

This definition highlights the informal nature of partnerships.

Question 3

Is a partnership considered a separate legal entity from its partners?

Answer 3

No, a partnership is not a legal entity separate from the partners themselves.

Question 4

What is required to form a partnership?

Answer 4

At least two persons

The PA 1890 does not distinguish between actual and legal persons.

Question 5

What is the primary reason clients may seek assistance to avoid creating a partnership?

Answer 5

Concerns about being subject to unlimited liability.

Question 6

What is one advantage of forming a partnership?

Answer 6

It costs nothing to create a partnership, as no formality is required.

Question 7

What fiduciary duty do partners owe to one another?

Answer 7

An overriding duty of good faith.

Question 8

What sections of PA 1890 reflect equitable principles in partnerships?

Answer 8

• Honest and full disclosure (s 28 PA 1890)
• Unauthorised personal profit (s 29(1) PA 1890)
• Conflict of duty and interest (s 30 PA 1890)

Question 9

What type of liability do partners have for partnership debts?

Answer 9

Personal liability

Partners are liable for contracts binding on the firm.

Question 10

How are partners’ liabilities categorized in the PA 1890?

Answer 10

• Contractual liability (s 9 PA 1890)
• Tortious liability (ss 10 and 12 PA 1890)

Question 11

What happens to a new partner’s liability for debts incurred before their joining?

Answer 11

A new partner is not automatically liable for debts incurred before they joined (s 17(1) PA 1890).

Question 12

What must happen for a former partner to become liable for debts incurred after leaving?

Answer 12

They can be held liable unless the third party has been notified of their departure.

Question 13

What is ‘holding out’ in the context of partnerships?

Answer 13

When a non-partner represents themselves as a partner, they may incur liability for partnership debts (s 14 PA 1890).

Question 14

What dictates whether a partnership is bound by a contract made on its behalf?

Answer 14

Whether the individual acting on behalf of the firm is a partner or a non-partner.

Question 15

What is the effect of s 5 PA 1890 regarding partners acting as agents?

Answer 15

It provides a statutory rule of agency that binds the firm under certain circumstances.

Question 16

What is the concept of ‘apparent authority’ in agency?

Answer 16

An agent may bind the firm if they have apparent authority, even without actual authority.

Question 17

How is tax handled for partners in a partnership?

Answer 17

Each partner is liable to tax as an individual on their share of the income or gains of the partnership.

Question 18

What is the taxation principle for capital gains in partnerships?

Answer 18

Normal capital gains tax principles apply on disposal of a capital asset by a partnership.

Question 19

What does the PA 1890 provide regarding partnership agreements?

Answer 19

It contains default provisions that apply in the absence of a partnership agreement.

Question 20

What can partners do with their mutual rights and obligations under an agreement?

Answer 20

They can vary them at any time by unanimous consent (s 19 PA 1890).

Question 21

What is the fallback provision in PA 1890 for partners?

Answer 21

Most provisions can be overridden by agreement between partners.

Question 22

What does the PA 1890 contain regarding partnership relations?

Answer 22

A default code that applies to relations between partners in the absence of any contrary agreement

This includes written or oral agreements, express or implied.

Question 23

What is typically included in a formal written partnership agreement?

Answer 23

• 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
• Work input and roles
• Partnership decision making
• Incoming partners
• Retirement/expulsion of existing partners
• Non compete / other restrictions

Question 24

What is the significance of the commencement and duration clause in a partnership agreement?

Answer 24

It sets out a date on which the rights and obligations contained in the agreement will commence

Default provisions apply until the commencement date if partners begin working together before the agreement.

Question 25

What restrictions are placed on the partnership name?

Answer 25

It must not include 'limited', 'ltd', 'LLP', 'public limited company', be offensive, be the same as an existing trademark, contain a sensitive word, or suggest a connection with government without permission.

Question 26

What defines partnership property according to PA 1890?

Answer 26

All property brought into the partnership on account of the firm or for the purposes of the partnership business is deemed partnership property ## Footnote This includes property bought with partnership funds.

Question 27

What is the default provision regarding shares in income, capital, and profits under PA 1890?

Answer 27

All partners are entitled to share equally in capital and profits and to contribute equally towards losses ## Footnote This holds even if capital contributions are unequal.

Question 28

What is the default position regarding partners' remuneration?

Answer 28

A partner is not entitled to a salary without an express agreement stating otherwise ## Footnote All partners are entitled to share equally in income profits by default.

Question 29

How is decision making handled in a partnership according to PA 1890?

Answer 29

Partnership decisions are decided by majority, except for changes to the nature of the partnership business, introducing a new partner, and varying partners' rights and duties, which require unanimity.

Question 30

What is required for a new partner to join a partnership?

Answer 30

Unanimous consent of all existing partners ## Footnote It is advisable to include written consent in the agreement.

Question 31

What must partners agree upon regarding expulsion?

Answer 31

Expulsion provisions must be agreed in advance; otherwise, a partner cannot be expelled by majority vote without prior agreement.

Question 32

What happens if a partner leaves a partnership without an agreement?

Answer 32

The partnership is dissolved ## Footnote This is because 'partnership' refers to all partners collectively.

Question 33

What does PA 1890 state about automatic dissolution?

Answer 33

A partnership is automatically dissolved when a partner leaves if no fixed term has been agreed ## Footnote This can lead to a technical dissolution where a new partnership is formed by remaining partners.

Question 34

What is a non-compete clause in a partnership agreement?

Answer 34

A clause preventing current partners from competing with the firm, implied by default under s 30 PA 1890.

Question 35

What are the common ways a partnership can be dissolved under PA 1890?

Answer 35

* Expiry of a fixed term * Completion of a specific venture * Death or bankruptcy of any partner * Notice from any partner * Partnership business becoming unlawful * Court dissolution as a last resort

Question 36

How are assets distributed upon the dissolution of a partnership?

Answer 36

Surplus assets are shared according to the asset surplus ratio or, if none is agreed, the profit share ratio or equally ## Footnote This follows the payment of all debts and liabilities.

Question 37

What is a Limited Liability Partnership (LLP)?

Answer 37

A hybrid vehicle that combines elements of both a company and a partnership, providing limited liability for its members ## Footnote It is treated as a separate legal entity from its members.

Question 38

What are the key statutory instruments supplementing the Limited Liability Partnerships Act 2000?

Answer 38

* Limited Liability Partnerships Regulations 2001 * Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009

Question 39

What is required to form an LLP?

Answer 39

At least two persons associated for carrying on a lawful business with a view to profit ## Footnote A 'person' can include a company.

Question 40

What is the registration process for an LLP?

Answer 40

Members fill out Form LL IN01 and submit it to Companies House with the relevant fee ## Footnote The form must include the LLP name, registered office address, and designated members.

Question 41

What are some commercial uses for LLPs?

Answer 41

* Professional partnerships (solicitors, accountants) * Joint ventures * Investment schemes * Property development projects

Question 42

What happens to a partner's membership if they are subject to disqualification?

Answer 42

They may not be a member of the LLP.

Question 43

What is the role of Companies House regarding LLP information?

Answer 43

Companies House can challenge or reject information that it believes is inaccurate, incomplete or fraudulent.

Question 44

What requirement was introduced for registered addresses of LLPs in March 2024?

Answer 44

The registered address must also be an 'appropriate registered address', the same requirement as for companies.

Question 45

Under what circumstances can a person not be a member of an LLP?

Answer 45

A person may not be a member if they are subject to disqualification as a director under the director disqualification legislation.

Question 46

What is issued by the Registrar of Companies once an LLP is registered?

Answer 46

A certificate of incorporation as conclusive evidence that all legal requirements have been complied with.

Question 47

What are some obligations of LLPs to file information with Companies House?

Answer 47

* Change of name * Change of registered office and e-mail * Changes in membership * Creation of a charge * Annual confirmation statement * Accounts

Question 48

What in-house records must an LLP maintain?

Answer 48

Registers of its members and of its 'people with significant control' (PSCs).

Question 49

Who are considered members of an LLP?

Answer 49

Those who subscribed to the incorporation document and those who became members later by agreement.

Question 50

What is the minimum number of members required for an LLP?

Answer 50

At least two formally appointed members.

Question 51

What are the obligations of designated members in an LLP?

Answer 51

* Signing the accounts on behalf of the members * Making filings at Companies House * Acting on behalf of the LLP if it is wound up

Question 52

Under what circumstances can a member cease to be a member of the LLP?

Answer 52

* Their death * Agreement with other members * Giving notice to other members * Dissolution (if a body corporate)

Question 53

What is the purpose of the LLP Agreement?

Answer 53

It sets out the formal procedures and arrangements agreed by the members for the operation of their business.

Question 54

Is a formal Members’ Agreement required for an LLP?

Answer 54

No, members are not obliged to have a formal Members’ Agreement.

Question 55

What happens in the absence of a Members’ Agreement according to the 2001 Regulations?

Answer 55

The eleven default provisions will apply.

Question 56

List three default provisions from the 2001 Regulations.

Answer 56

* Members share equally in capital and profits * An LLP must indemnify its members for payments made * Every member may take part in management

Question 57

How is an LLP treated for tax purposes?

Answer 57

An LLP is treated as a partnership; it is not taxed, but the partners are.

Question 58

What is one major difference in taxation between an LLP and a company?

Answer 58

A company pays corporation tax on its income, whereas an LLP does not.

Question 59

What relief does the LLPA provide regarding stamp duty?

Answer 59

Relief from stamp duty where a partnership is incorporated as an LLP and assets are transferred, subject to strict tax avoidance conditions.

Question 60

What are some corporate characteristics of LLPs?

Answer 60

* Separate legal personality * Limited liability for members * Required to file accounts at Companies House * Capable of creating a floating charge over assets * Some provisions of company law apply

Question 61

What are some partnership characteristics of LLPs?

Answer 61

* No share capital or capital maintenance requirements * No real distinction between members and management * Members can decide on profit sharing and management duties * Tax transparent like partnerships

Question 62

What disadvantage do members of an LLP face compared to company members?

Answer 62

LLPs are subject to the 'clawback' rule, where money taken out of the LLP can be reclaimed in certain circumstances.