Sole Traders and Partnerships

What are the characteristics of a Sole Trader?

• Operated by a single individual

• Does not need formal incorporation or structure

• Unlimited personal liability

• Taxed as the individual

How do you begin a Sole Trader business?

Simply begin the business alone

What are the characteristics of a Partnership?

• Two people working together with a view to a profit

• Does not need formal incorporation or structure

• Unlimited personal liability (jointly for contractual liability and jointly and severably for tortious liability)

• Taxed as the individual partners

How does liability within a Partnership work?

• Partners are jointly liable for contractual liability

• Partners are jointly liable and severably liable for tortious liability

• New partners are not liable for debts/ obligations incurred before joining

• Former partners will be liable unless they have provided actual or constructive notice

• A non-partner may be liable through ‘holding out’

What is Actual Notice in the context of a partner leaving a partnership?

Notifying third partners with whom they had dealings that they have left the firm

What is Constructive Notice in the context of a partner leaving a partnership?

Notifying third parties with whom they did not have dealings that they have left the firm ie in the London Gazette

How can a non-partner be held liable through ‘holding out’?

• They hold themselves out (or allow themselves to be held out) as a partner

• A third party engages as a result of this holding out

• The third party believes this person was a partner

Can a non-partner agent bind the firm?

Yes, they must either have authority (actual, express or implied) or appear to have authority (partnership allows a representation of authority)

When can a partner bind the firm without the other partners’ consent?

• The act is in the usual kind of business carried on by the firm

• The business was carried out in the usual way

• The third party believed that they were a partner or that they were authorised

Taxation of a Partnership

• Each partner is liable for themselves for Income and Capital Gains Tax

• The partnership must make a single tax return of its profits as agreed with HMRC

• The partnership may choose its own accounting period

What should you advise that a Partnership Agreement cover?

• Commencement and Duration

• Name and place of business

• Partnership Property

• Profit Sharing Ratio

• Drawings/ Salary

• Work input and Roles (authority)

• Decision making

• New partners

• Expulsion/ leaving

• Restrictions for out-going partners

What does the PA 1890 say regarding salary for partners?

It is not permitted unless expressly allowed in the partnership agreement

What does the PA 1890 say regarding Partnership Property

Property brought in on account of the firm and property bought with the firm’s money is partnership property, subject to the partnership agreement

Under the PA 1890, which decisions in a partnership must be decided unanimously (subject to a partnership agreement)?

• Changes to the nature of the partnership business

• Introducing a new partner

• Varying the rights and duties of partners

• Expulsion of a partner

When are restrictions for out-going partners enforceable?

When reasonable in duration, geographical area, and scope, and protect and legitimate business interest

When does a Partnership dissolve (subject to any partnership agreement)?

• Expiry of a fixed term

• Completion of a specific venture

• Death or bankruptcy of any partner

• By notice from any partner

• By unlawfulness

• By the court as a last resort

How are assets distributed following the dissolution of a partnership (subject to a partnership agreement)?

1. Debts and liabilities are paid

2. Partners’ original capital is returned to them

3. Any surplus is shared equally (or according to the agreed Asset Surplus Ratio)