Prep 1 Partnerships

s1(1) PA 1890

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

Suggests for whether a Partnership has been formed under s2 PA 1890

* Profit Sharing
* Contribution to Decision Making
* Loan of Money does not make a partnership
* Partnership less likely where a person is not “held out” as a partner

Advantages to Partnerships

* No costs or formalities
* No formalities for running
* High degree of confidentiality
* Can be converted to a limited company or LLP

Fiduciary Duty and ss28, 29(1) and 30 PA 1890

* Honest and Full Disclosure
* No unauthorised personal profit
* No conflict of duty and interest

Contractual Liability for Partnerships under ss9, 10 and 12 PA 1890

Every partner is liable jointly with the other partners

Tortious Liability for Partnerships under ss10 and 12 PA 1890

Partners liability is joint and several

Liability of Partners under s17 PA 1890

* Partner not automatically liable for debts incurred before joining
* Partners liable after retiring for debts incurred whilst still a partner
* Partner may be relieved of liability by novating the agreement with the creditor’s consent

Liability for Former Partners under s36 PA 1890

Third party can treat all partners of the firm as jointly liable to pay any debt incurred unless notified by either:

* Actual Notice (s31(1) PA 1890)
* Constructive Notice (s36(2)) (London Gazette)

Liability for Non-Partners who are “holding out” under s14 PA 1890

Non-Partners can be liable if:

* A representation is made to the third party that the person is a partner
* The third party acts in response
* The third party believes the person is a partner

Does a contract with the partner bind the firm?

Yes under s5 PA 1890

Does a contract with a non-partner bind the firm?

Only under the common law of agency

How can partner’s consent to an agent’s entry into a contract?

* Actual, Express or Implied Authority
* Ratification
* Performance of the Contract

When can a partner bind the firm against the others’ wishes under s5 PA 1890?

* What was the third party’s perception?
* Is the act in the business of the kind carried on by the firm?
* Is the act in the usual way of business?

When can a third party not bind a firm against the other partners’ wishes?

* Where they knew the partner was not authorised
* Where they did not know or believe the partner was a partner

Apparent/ Ostensible Authority to bind a Partnership

An agent may still bind where the firm represents or allows a representation that they have authority

Taxation of Partnerships

* Each partner is liable to income and capital gains tax as an individual on their share of the income/ gains
* The partnerships is not liable to tax

PSR

Profit Sharing Ratio

Which sections of PA 1890 cannot be overridden by a partnership agreement?

Ss1 and 2 (existence of a partnership) and ss5 to 18 (relationships between partners and third parties as well as liability for debts)

Variations to Partnership Agreements under s19 PA 1890

May be made by unanimous consent: either express or by a course of dealing

Commencement and Duration of a Partnership

* Starts when s1(1) PA 1890 is satisfied
* May last for a fixed term or indefinitely until terminated

Continuing a Partnership after the Expiration date under s29 PA 1980

There is a presumed partnership on the same terms as before

Partnership Property

Each partner deemed to own a share in the property belonging to the partnership

Partnership Property under s20 PA 1890

All property brought into the partnership whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property 

Partnership Property under s21 PA 1890

All property bought with money belonging to the firm/ partnership is deemed to have been bought on account of the firm/ partnership, unless the contrary intention is shown

Partnerships and Salary under s26(6) PA 1890

Without an agreement a partner is not entitled to a salary

Partnerships and Management s24 PA 1890

Every partner may take part in management but are not required to do so

Partnerships and Decision-Making s24 PA 1890

All decisions must be made by majority apart from the following which require unanimity:

* Changes to the nature of the partnership business (s24(8))
* Introducing a new partner (s24(7))
* Varying the rights and duties of partners (s19)

Incoming Partners and Partnerships s24(7) PA 1890

No person may be introduced as a partner without the consent of all existing partners

Partnerships and Expulsion s25 PA 1890

A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this

Technical Dissolution

When a partner leaves a the partnership is dissolved but a new partnership is formed with the remaining partners

Non-Compete Clauses under s30 PA 1890

If a partner does so without consent, they must account to the firm for all profits made by them in that business

Non-Solicit Clauses

Prevents from soliciting business from partnership’s clients

Non-Dealing Clauses

Prevents from entering contracts with clients, former clients or employees of the partnership

Circumstances for Automatic Dissolution

* Expiry of Fixed Term (s32(a))
* Completion of specific venture (s32(b))
* Death or bankruptcy of any partner (s33)

Circumstances for Non-Automatic Dissolution

* By notice from any partner where there is no fixed duration (ss26 and 32(c))
* Where the partnership business becomes unlawful (s34)
* By the court as a last resort (s35)

Assets on the Dissolution of a Partnership under s44(b)(3) PA 1890

Once all debts and liabilities have been paid, any money/ assets left will be distributed so that each partner is paid back their original capital first

ASR

Asset Surplus Ration

Dissolution with no ASR

s44(b)(4) applies and surplus assets are shared in accordance with the agreed PSR

Dissolution with No PSR

Surplus are shared equally in accordance with s24(1) PA 1890

Features of a Limited Liability Partnership

* Separate Legal Entity
* Partnership
* Tax Transparent

Legislation Applicable to LLPs

* LLPA 2000
* Limited Liability Partnerships Regulations 2001
* Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009
* Insolvency Act 1986
* Company Directors Disqualification Act 1986

Formation of an LLP under s2(1)(a) LLPA

Two or more persons associated for carrying on a lawful business with a view to profit can incorporate an LLP

Formalities for Registering an LLP

* Subscribing members must submit for LL IN01 with the relevant fee
* Form must state the name of the LLP, the registered office’s address and which members are to be designated members s2(2) LLPA 2000
* Certificate of Incorporation

LLPs and the Continuing Registration Regime

LLPs must fil information with Companies House for all of the following:

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

Members in an LLP

* Must be at least two members at all times
* No maximum
* At least two members must be designated members

Obligations of Designated Members in an LLP

* Finding the accounts on behalf of the members
* Making filings at Companies House
* Acting on behalf of the partnership, it it is wound up

Ending Membership in an LLP under s4(3) LLPA 2000

* Death
* Agreement with the other members;
* Giving notice to the other members; or
* Dissolution

LLP Agreement

A private document which sets out the formal procedures and arrangements which the members have agreed to e the basis of the operation of their business

Members Agreement for an LLP

Regulates the relationship between members but in its absence the relationship is governed by the 11 default provisions in regulations 7 and 8 of the 2001 Regulations

Taxation of LLPs

Partners are liable for income and capital gains tax but the LLP is not liable for tax

Corporate Characteristics of LLPs

* Separate legal personality
* Limited liability for members subject to restrictions
* Must file accounts at Companies House
* Capable of creating a floating charge
* Some provisions of Company Law and Insolvency Law apply

Partnership Characteristics of LLPs

* No share capital or capital maintenance requirements
* No real distinction between members and the management board
* Members can agree how to share profits, management duties, decision-making, appointments and retirement provisions
* A members agreement operates like a private partnership agreement
* Tax transparent

Clawback Rule for LLPs

In certain circumstances money taken out by members up to two years before commencement of a winding up can be clawed back into the pool of assets available to repay the creditors (s214A IA 1986)