Traditional Partnerships

Question 1

What is the statutory requirements of a partnership?

Answer 1

• Carrying on business in common
• With a view to making a profit

Question 2

Minimum number required for partnership?

Answer 2

Two

Question 3

Is a partnership a separate legal entity?

Answer 3

No

Question 4

Could a company be a partner?

Answer 4

Yes

Question 5

What are two factors that could make a partnership more likely?

Answer 5

Profit share / loss sharing
All taking part in decision making

Question 6

What are some advantages of a partnership?

Answer 6

• No cost in creating one
• No formalities
• No filing or disclosure
• High confidentiality

Question 7

What type of relationship and duty arises between partners?

Answer 7

Overriding duty of good faith

Question 8

What are some equitable principles that arise from the overriding duty of good faith in a partnership?

Answer 8

1) Honest and full disclosure
2) Unauthorised personal profit
3) Conflict of duty and interest

Question 9

What are the types of liability partners have for partnership debt?

Answer 9

1) Contractual liability
2) Tortious liability

Question 10

What is contractual liability in partnerships?

Answer 10

Every partner in a firm is liable jointly with other partners

Question 11

What is tortious liability in partnerships?

Answer 11

Partners liability is joint and several

Question 12

What happens if a creditor obtains judgement against a partner?

Answer 12

It does not discharge the others liability, so technically liability is joint and several

Question 13

Is a new partner liability for debts incurred by the partnership before they joined?

Answer 13

No. They do not have liability for debts before they joined.

Question 14

Is a retired partner still liable for debts that arose whilst they were partner?

Answer 14

Yes, unless they novate the relevant agreement with consent of creditor

Question 15

Could a former partner be liable for new debt?

Answer 15

Generally not, unless being held out making Third Parties think they are involved

Question 16

How would a partnership provide notice to creditor so that a former partner is not held liable for new debts?

Answer 16

1) Actual notice
2) Constructive notice

Question 17

What is actual notice to creditors in partnerships?

Answer 17

Providing actual notice directly to creditors – for those who have dealt with the partnership before

Question 18

What is constructive notice?

Answer 18

Third party considered to have knowledge if publicly available through proper channels if they had done due dilligence - such as in the London Gazette

Question 19

Could a former partner be liable for debts to a new third party who did not know them to be a partner before they left?

Answer 19

No, they can’t. And no notice is given.

Question 20

Under what circumstances can a person who is not a partner have liability for a partnership debt?

Answer 20

If they hold themselves out as a partner and Third Party acts on that.

Question 21

What are the statutory elements of “holding out” as a partner?

Answer 21

i) A representation to 3rd party to give effect that person is a partner
ii) Third party’s action in response (giving credit to firm)
iii) Third party’s state of mind (believing in representation)

Question 22

When would a partnership be bound by a non-partners act?

Answer 22

Through common law of agency – consenting for third party to act.

Either by actual express or implied authority.

Question 23

What happens if a partner is not content with agent’s act?

Answer 23

They may still be liable as the law protects Third Parties.

Question 24

What do the common law rules of agency do?

Answer 24

They establish whether or not the firm is bound as principal by a non-partner.

Question 25

When could a non-partner bind a firm under the common law rules of agency?

Answer 25

If they have apparent authority to enter into a contract.

Question 26

When does apparent authority arise?

Answer 26

When firm represents / permits a representation to be made to third party that person has authority to bind the firm.

Question 27

What is an example of apparent authority?

Answer 27

If partnership name someone marketing manager, assumption that they can make marketing decisions.

Question 28

What happens if a third party relies on that representation of apparent authority?

Answer 28

Then the partnership is bound.

Question 29

Does “holding out” count as apparent authority?

Answer 29

Yes

Question 30

What is an example of holding out?

Answer 30

An ex-partner, still on letterhead, after they retire, can still act as partner.

Question 31

Can a firm be bound even if other partners not happy to be bound by contract made by another partner?

Answer 31

Yes, under s5

Question 32

Who does S5 apply to?

Answer 32

It only applies to partners entering into a contract.

Question 33

In s5, under what circumstances will a partner’s unauthorised act bind the firm?

Answer 33

1) Act is for carrying on business of the kind carried on by the firm; 2) Act is carrying on such a business in a usual way

Question 34

When would the firm not be bound under s5?

Answer 34

1) Third party knew partner in question not authorised to enter into contract 2) Third party did not know or believe partner was a partner

Question 35

What could happen to a partner of a firm who binds the partnership without having actual authority?

Answer 35

They may be liable to the other partners for breach of contract if agreement, or breach of fiduciary duty.

Question 36

How are partners liable to tax?

Answer 36

As individuals on their share of income or gains of partnership

Question 37

What does HMRC require of a partnership as a firm?

Answer 37

A single tax return of its profits

Question 38

What does HMRC require of partners as individuals?

Answer 38

Individual tax returns containing all income and expenditure

Question 39

What taxes are partners liable for?

Answer 39

1) Income Tax 2) Capital Gains Tax

Question 40

Are partners liable for other partners tax?

Answer 40

No, doesn’t have anything to do with them.

Question 41

How does CGT apply to partners?

Answer 41

Each partner treated as owning fractional share of asset. On disposal, will be taxed on their share of any gain.