Business Law and Practice LPC Notes (2022) - High distinction/98% attained
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DistinctionNotesLPC
WS1: Partnerships and Types of Business Entity (Chapters 1, 13, 14, 15, 16 & 17)
Brief Overview of Different Structures (Trading Vehicles)
Unincorporated Business – requires few/no administrative steps to be formed. Usually treated as being
the same as its owners with no separate legal status.
Incorporated Business – require a formal registration process before they can legally exist. Have a
separate legal existence from their owners.
Type What is it? Advantages Disadvantages
Sole trader Someone who runs a business on his → No formal steps except → Unlimited liability
(sole own as a self-employed person. They: being registered with for business debts:
practitioner) ✓ Have the right to make all the HMRC personal assets
decisions affecting the business; → Freedom to run as may be used to
✓ own all the assets of the business; owner sees fit repay debts
✓ are responsible for paying income → Sole decision-maker → Lacks legal status
tax on all the profits of the business; → All profits belong to of incorporated
and owner forms
✓ have unlimited liability for the debts → No day-to-day
of the business. support
✓ Work entirely alone or employ
people
General Governed principally by the Partnership → Very easy to form → Unlimited liability
Partnership Act 1890. (only require two for firm’s debts
✓ Occurs where two or more persons people) → Decision making
run and own a business together → Freedom to run as can be
with a view to make a profit. owners see fit cumbersome
✓ Is unincorporated – NOT a body → Support of joint → Lack of written
corporate decision making agreement lead to
→ All profits belong to uncertainty
owners – the partners → Lack status of
incorporated
forms
→ Leaving partner
must be brought
out by remaining
partners (may not
be favourable)
Companies ✓ A company in the UK is formed by → Limited liability for → Must register to
registering certain documents with business debts set up
a public official, in accordance with → Greater status than → Extra formality and
the Companies Act 2006. other forms costs to run
✓ Has separate legal personality → Potentially larger pool → Extra legal duties
✓ Decisions are made either by the of investors and potential
company’s directors or liability for
shareholders. directors
o Directors run the company. → Information (inc
o Shareholders are the owners. finances) made
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✓ Subject to corporation tax, not public
income tax → Profits earned by
✓ Liability is limited to its constitution company, not
– CA 2006, s3(1). Can be: Limited by owners directly
shares (more usual) or guarantee
✓ Types of companies
o Public company limited by shares
o Private company limited by
shares
o Other less common types
Limited A form of unincorporated business → Limited liability for → Must register to
Partnerships established under the Limited business debts set up
Partnerships Act 1907. → Freedom to run as → Information (inc
(not a ✓ Similar to partnership in that there business owners see fit finances) made
separate must be at least one general partner → Support of joint public
legal entity) who has unlimited liability. decision-making → Some extra
✓ However, an LP is permitted to have (ordinary matters are formalities and
(introduction a limited partner whose liability is decided by a majority costs to run
of a new limited to the amount he initially of the GENERAL
partner – do invested, providing: partners)
not need ▪ Not controlling or managing
consent of the LP
the limited ▪ Not having the power to take
partners) binding decisions; and
▪ Not removing his contribution
to the LP for as long as he is in
business.
✓ LPs must be registered with the
Registrar of Companies.
Limited A form of incorporated business → Limited liability for → Must register to
Liability established under the Limited Liability business debts set up
Partnerships Partnerships Act 2000. → Extra formality and
(LLPs) ✓ Hybrid between a partnership and a costs to run
limited company
✓ Can only be formed by two or more
members carrying on a lawful
business with a view of profit
✓ Must be registered with CH and pay
fee to do this
✓ Separate legal personality
✓ Liability is limited
✓ Partners taxed as if the business
were a partnership rather than a
company
✓ Run with informality and flexibility
of a partnership
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Partnerships
Approach to an Exam Question
1 Is there a partnership?
2 Who are the partners? Are they still partners?
3 What type of partnership is it?
→ Fixed / At will?
→ GP / LP / LLP?
4 What are the relevant terms?
→ Express by oral/written agreement – s.19 PA 1890
→ Inferred from conduct?
→ Implied by PA 1890, LPA 1907, LLPA 2000
5 Apply to facts
6 Conclude
Watch out for
✓ The time frame – is there a gap? What could have happened in between?
✓ Profit – be careful, have they been deliberately vague? Is it interest? An agreed
payment? Consultancy fee?
✓ Do you need more information? Ask questions!
✓ Restating statute terms? Clarity, contractual remedy.
✓ What will happen to the partnership on dissolution? On death of a partner? Try
and think of questions that will be asked by the partner in this scenario…
✓ A partnership – either an express agreement which need to be able to ascertain
the terms of and advise on, or an implied agreement by conduct/ PA 1890 which
again need to be able to advise on.
✓ Acting as agent? Do they have a share of the profits?
Recognising the Existence of a Partnership
General Partnership
Creation
s. 1 PA 1890: ▪ “Partnership is the relation that subsists between persons carrying on a business in
statutory common with a view of profit.”
definition → When this exists, partnership has been created regardless of any agreement, or
recognition/intention of the parties.
✓ Two or more persons
Persons may be company (Interpretation Act 1978 – unless told otherwise,
persons means legal persons)
✓ Carrying on a business (s. 45 – includes every trade, occupation or profession)
in common – two or more persons share responsibility for the business and for
the decisions which affect the business; do not need to be involved on a day-
to-day basis (low threshold);
✓ With a view of profit
• Each partner must register with the HMRC.
• If partnership made solely of individuals, partners taxed separately as self-employed
individuals, paying income tax on their share of the profits
• Does not have a separate legal status
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s. 2: guidance ▪ In determining whether partnership exists, regard should be had to:
(1) Joint Tenancy, Tenancy in Common etc. do not of themselves create partnership –
whether they do or do not share in the profits made from the use of that property
(2) Sharing of gross returns does not of itself create a partnership
(3) Receipt of share of profits = prima facie evidence of partnership, but not
conclusive
▪ Putting in capital is also an indication of a partnership
Effect of Creation ▪ A partnership has no separate legal personality
▪ This means:
▪ Partnership assets are owned by the partners, not the partnership
▪ Partners will be personally liable for any debts
▪ Beneficially, partnerships have a desirable lack of formality and there is no
requirement to make as much information public
Decision making ▪ Decisions are made by a majority vote (s24(8))
▪ Except:
- A decision to change the nature of the partnership business
can only be done unanimously (s24(8))
- New partners can only be introduced with the consent of all
existing partners (s24(7))
May be governed by an agreement, which can be oral/in writing/implied by conduct.
Fundamental Characteristics
Typical rights and responsibilities of partners include:
✓ To be involved in making decisions (s24(5))
✓ Share in the profits, any losses and ownership of assets of business (s24(1))
✓ Examine the accounts (s28)
✓ Insist on openness and honesty from fellow partners
✓ Fiduciary relationship with other partners (s28)
✓ Veto the introduction of a new partner (s24(7))
✓ Share unlimited liability for the debts (joint and several) (s24(1))
Duration
Express/Fixed Until a time, pre-determined by agreement (s.32(a))
Implied/At will Forever until dissolved by notice (s.32(c)) and (s.26(1)), death or bankruptcy (s.33)
Formalities
• There are no necessary formalities.
o However, written agreement is invaluable as evidence of relationship and its terms.
o It may also be useful to have a written constitution to which they may refer.
Effect of a Partnership Ending
• Any party will have the authority to wind up the firm’s affairs – see s39 & s44
• Proceeds will shared out in the following order – s44:
a) Creditors
b) Partners who have lent money
c) Partners’ capital entitlement to be repaid
• Any surplus will be shared between the parties
Advantages Disadvantages
❖ Allows commercial secrecy ❖ Can created fixed charges (but not floating)
❖ Informal in nature, easy to start up ❖ Each partner is fully liable for all debts of
❖ Flexible – make own arrangement/rules business
❖ Tax relief for startup losses can be claimed ❖ Any partner may act in apparent authority and
bind the firm
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