PARTNERSHIPS AND OTHER BUSINESS MEDIA from the partnership, the business or its property without the
consent of the other partners; and
PARTNERSHIPS: × they must be prepared to share with their fellow partners any
profits they make from carrying on a competing business
without the consent of the other partners.
What is a partnership?
Responsibilities implied by the act – s.24(1)-(2) PA 1980:
s.1(1) Partnership Act 1890 Partnership = persons carrying on business × The responsibility for bearing a share of any loss made by the
with a view to profit. – May form a partnership irrespective of contrary business.
intention. A partnership is formed once the definition is satisfied, not × The obligation as a firm to indemnify fellow partners against
when a decision to form a partnership is made. bearing more than their share of any liability or expense
Existence of partnerships: connected with the business.
s.1(1) PA 1890 No formality is needed to establish a partnership so a Liability for firm’s debts problem question:
partnership can be formed without the specific intent of the parties to
form one. Starting point:
s.2(3) PA 1890 Profit sharing is prima facie evidence of a partnership.
The partners will carry on business in common: s.9 PA 1980 Every partner is liable jointly with all partners:
This means that they will share responsibility for the business and all * Each partner is liable for 100% of the money and if other
decisions that affect it. partners can’t pay for it, the partner that is able to pay must pay
for 100% of the money.
No separate legal identity: * Each partner could be sued by a creditor for the whole debt.
The partnership is unable to own property or enter into contracts.
Instead, it is the individual partners who will sue, own property jointly, Liability of partners:
and enter into contracts jointly. If partnership goes insolvent, creditors s.17(1) A new partner will not automatically be liable in relation to any
can enforce debt against the partners personally. debts incurred by the partnership before he joined.
s.17(2) A partner will still be liable after he retires in respect of debts
How to avoid entering into a partnership? incurred by the partnership whilst he was a partner.
- Avoid merging your business
- If the business is a Joint Venture: All members will retain legal s.17(3) unless:
and beneficial ownership of their assets. Exclude the JV being a 1) The creditor agrees
partnership in the JV contract. 2) You specifically absolve them
- Instead of sharing profit, share gross returns 3) You novate the contract
- Make sure you regulate your venture with a written agreement
Civil Liability (Contribution) Act 1978 Partners are also severally liable
Characteristics of a partnership: for any civil liabilities, so partners can be sole or joint Defendants.
s.2 PA 1890 Badges of a partnership: Is the partnership liable?
- Profit sharing
- Mutual decision-making powers Actual authority:
- Right of all partners to examine accounts and veto the The partnership will always be liable for actions carried out under actual
introduction of new partners authorisation such as where:
- Sharing responsibility of loss of business * Partners have acted jointly
* Express actual authority if the partners express on partner to
Key considerations: represent the firm in a transaction
Tax transparency * Implied actual authority if the partners accept that one of more
- Allows for a high degree of confidentiality of them have authority to represent the firm in a particular way.
- Min 2 people needed
- PA 1890 does not distinguish between actual and legal persons,
so a company could be a partner.
s.5 Thus, all of those who were partners at the same time will be
Care needed: jointly liable even if one of the partners was acting as an agent for the
- If no Partnership Agreement, PA 1890 default provisions (also firm.
known as fall-back provisions) will apply. Default provisions are
disadvantageous and must set up a Partnership Agreement. Apparent authority:
- Very easy to create unintentionally Partners may be liable for actions that were not actually authorised but
- Unlimited joint liability that another party to the transaction believed were authorised
- s.5 PA 1890 Each partner is an agent of the firm and will bind (ostensible authority).
the firm and other partners by contracting with third parties.
- s.6 PA 1890 The firm will be bound by the actions of anyone Subj test:
authorised to act on the firm’s behalf. * Other party did not know partner did not have authority to act
- s.30 PA 1890 All partners share a fiduciary relationship and * Other party then proceeds to deal with the persons whom he
have a duty not to compete with the firm by carrying out a believes to have authority.
similar business without the permission of the other partners
Advantages:
- it costs nothing to create a partnership. In this case all partners will be liable, but the partner will need to
- May start as partnership before converting to limited company indemnify the other partners for the damaged.
- Many partnerships are professional partnerships such as
lawyers, accountants, surveyors and architects. Tortious Liability:
- Cheaper administrative costs as no need to file profits
- Tax transparency – taxes flow through to the partners s.10 PA 1980 Firm is liable for tortious liability of a partner who acts in
the ordinary course of the firm’s business or acts with the authority of
Formalities required for partnerships: the other partners.
s.12 PA 1980 All partners will be jointly and severally liable.
Formalities:
1. Requirements on naming the partnership Which partners are liable?
2. No limitation on size
3. s.1203 CA 2006 Partnership may include a statement on s.8-9 PA 1980 If the partnership agreement has been breached by
stationery listing all partners. acting without authority, the firm is not liable but the individual partner
4. Partners must pay income tax, VAT and NI will be.
5. Must notify HMRC of the partners’ identity
The partner who entered into the contract can be sued by the creditor
Partners’ responsibilities: due to privity of contract rules.
Utmost good faith – s.28-30 PA 1980: s.12 PA 1980 If the partnership is sued and loses litigation, all partners
× Partners must divulge to one another all relevant info will be jointly and severally liable. If one of the partners is sued but all
connected with the business and their relationship are liable, the one in litigation can claim indemnity from the other
× they must be prepared to share with their fellow partners any partners.
profit or benefit they receive that is connected with or derived
BLP – All chapters – Revision notes | Page 1 of 36
,Persons who are not partners: Decision-making:
1. s.14 Holding oneself out as a partner: PA 1980 implied terms:
Nationwide Building Society v Lewis Person can be liable even s.24(7) Unanimity is needed to introduce new partner
if not partner. Test: holding oneself out as a partner, the other s.24(8) Unanimity is needed to change nature of business
party relied on the misrepresentation and consequently acted s.24(8) All other decisions are made by a simple majority
on in.
Partnership Agreement potential clause:
2. s.36 Partner need not give notice when leaving the partnership Include a clause about expulsion of a partner. Could change
but if they do not, they could be sued even after leaving the majority/unanimity required for different types of decisions. Could
partnership. – letter to clients is actual notice, London Gazette designate partners to deal with decisions based on expertise. If you
ad is constructive notice. want to allow partners to vary the partnership agreement, add specific
3. No need for notice if you are bankrupt/pass away clause for this.
Liability under a novation agreement: Duration:
1. Between creditor, partners at the time when contract was PA 1980 implied terms:
made, and the new partnership s.26 If no fixed term has been agreed, the retirement of one partner
2. Agreed that the creditor will release the contracted partners will dissolve the partnership. Retirement notice doesn’t need to be in
and hold the new partnership liable writing.
3. A retiring partner could be released from debt in place of a new s.32 Partnership ends if fixed term expires, purpose has been
partner. – If no new partner, then for retiring partner must give completed or one of the partners has given notice.
consideration in return for being released from the contract. s.33 Partnership dissolved if any partner goes bankrupt/dies.
4. Can still sue the retired partner. s.35 Court may order dissolution on grounds (a)-(f).
THE PARTNERSHIP AGREEMENT CLAUSES: Partnership Agreement potential clause:
Limit the partners’ rights to terminate so s.26 won’t apply. Include
The Partnership Act is not beneficial for partners, so it is common for terms on retirement and payment of exiting partner’s shares. May
partners to draw up and sign a partnership agreement. include a minimum notice period for partners.
Commencement: Add a clause setting out that partnership should continue as long as
PA 1980 implied terms: there are at least 2 partners. Also include provisions for buying the
s.1(1) PA 1890 No formality is needed to establish a partnership so a other partners’ shares/keeping their money.
partnership can be formed without the specific intent of the parties to
form one. Payment of outgoing partner’s share:
PA 1980 implied terms:
Partnership Agreement potential clause: s.42 If partner leaves and there is a delay on payment of his share,
Agreement can specify commencement date. partner is entitled to 5% interest on the amount of his share.
Financial input: Partnership Agreement potential clause:
PA 1980 implied terms: Should include:
s.24(3) Payments above partner’s capital contribution attracts a 5% a) Whether there is an obligation for partners to buy the share
interest rate per annum. b) Valuation of shares
c) A clause on professional valuation if partners disagree
Partnership Agreement potential clause: d) Date payment will be due
Could specify how much input/how often/when. e) An indemnity for liabilities of the firm
Shares in income/profits and losses: Restraint of trade following departure:
PA 1980 implied terms: PA 1980 implied terms:
s.24(1) All partners share equally in capital and profits and divide losses s.30 Partner cannot compete during partnership without the consent
equally. of other partners. Must pay all profits that he has made back to the
s.24(4) No partner is entitled to interest on capital prior the firm.
ascertainment of profits.
s.24(6) No partner is entitled to remuneration. Partnership Agreement potential clause:
Include a non-compete clause to protect confidentiality and business
Partnership Agreement potential clause: connections. This clause must be reasonable, otherwise could be
Salary entitlement could be divided to reflect time/skill. Could add invalidate by the court. Reasonable if reasonable for the protection of
interest on the partner’s contributions. Could introduce a ratio of a legitimate business aim. Must also be reasonable as to geographical
sharing based on the % of capital contribution which should take into area and in duration – eg. cannot go on forever and cannot limit partner
account any losses. from setting up a business outside the local area where the partnership
operates.
Withdrawals:
PA 1980 implied terms: Potential clauses to add:
None Non-dealing clause: prevents partner from entering into contracts with
customers/employees.
Partnership Agreement potential clause: Non-solicitation clause: prevents partner from soliciting contracts with
Could set out a monthly limit or prevent withdrawals if no profits. customers/employees.
Work input: CHOICE OF BUSINESS MEDIA:
PA 1980 implied terms:
s.24(5) Every partner must take part in the partnership When the client is choosing business media, consider the below:
Partnership Agreement potential clause: Sole trader
Should state degree of commitment – can bar anyone from acting.
Add clauses regarding maternity leave, sick pay, holiday entitlement. • Number of persons needed for set up: 1 person. Cannot form sole
trader business for less/more than 1.
Increase/ decrease in asset value: • Control and management: Sole trader has complete control over the
PA 1980 implied terms: running of the business. This gives sole traders flexibility but pressure
if working without support.
Profits and capital is shared equally. • Liability: Not limited - Unlimited personal liability.
• Expenses when setting up: No formalities so no setting up costs
Partnership Agreement potential clause: • On-going expenses after the business is set up: None necessary,
Entitlement could reflect the capital contribution % of each partner – although usually accountants will be involved in keeping accounts
asset-surplus sharing ratio. • Methods of financing: No quick options. Sole trader can borrow from
a bank but cannot create floating charges not raise finance by share
Assets: issue.
PA 1980 implied terms: • Profits: All profits go to the owner.
• Tax: Owner pays tax on the business profits as an individual (income
None tax + capital gains tax)
• Regulation: None
Partnership Agreement potential clause: • Publicity: Fewer requirements, easy to maintain privacy.
Who owns what? Is it owned in equal shares? Are there any trusts? • May trade immediately? Yes.
Clarifying ownership will help on dissolution.
BLP – All chapters – Revision notes | Page 2 of 36
, Partnership • Methods of financing: Company can borrow + create floating charges.
s.1(1) Partnership Act 1890 Partnership = persons carrying on business with Again, of members give personal guarantees, limited liability is lost. Can
a view of profit. – May form a partnership irrespective of contrary intention. raise finance by issuing shares – i.e. will be easier for a limited company
to obtain financing.
No separate legal identity. The partnership is unable to own property or enter
into contracts. Instead, it is the individual partners who will sue, own property • Liability to third parties: s.3(2) CA 2006 The shareholders’ liability to
jointly, and enter into contracts jointly. If partnership goes insolvent, creditors third parties is limited to the amount, if any, unpaid on their shares.
can enforce debt against the partners personally. • Legislation: CA 2006 + all other relevant legislation and common law.
• Publicity: Disclosure to Registrar of:
• Number of persons needed for set up: Min. 2 persons 1. s.86 CA 2006 Registered office
• Expenses when setting up: None, although it is beneficial to have a 2. s.441 CA 2006 Accounts
Partnership Agreement drawn up by lawyers (this may be expensive). 3. Information on directors (and secretary if the company has
• On-going expenses after the business is set up: None necessary, one) and members. - SBEEA 2015 Companies can now for a
although must pay for accountants fee keep registers of members, directors and secretaries at
• Management structure of the business: In accordance with the Comp. House as an alternative to internal registers.
Partnership Agreement, however if no agreement, the default 4. need to keep a PSC Register disclosing all persons of significant
provisions in the PA 1890 step in. control.
• Methods of financing: Partners can borrow but cannot create floating 5. Disclosing details of certain invoices and payment practices
charges. In addition, they also cannot raise finance by issuing shares.
• Liability: Not limited - Partners have unlimited personal liability.
• Legislation: PA 1890
• Publicity: Fewer requirements than for other options, easier to
maintain privacy. No disclosure required
PRIVATE VS PUBLIC COMPANIES:
• May trade immediately? Yes.
s.755 CA 2006 Only public companies can offer shares to public.
s.756 Offer to the public is defined. The prohibition applies to shares or
Limited Liability Partnership (LLP) bonds (i.e. debt securities).
An LLP is a hybrid as it has the flexibility of a partnership with the added
advantage of limited liability for its members. – Common for Law firms. Public company:
• Limited Liability? Yes.
An LLP has a separate legal entity from its members. But for tax purposes, it • Quick finance options? Yes
is treated as a partnership and the members will be taxed as partners, each • Set up costs low? No, as requires lawyers to set up + s.768 CA
being liable to pay tax on his share of the income of the LLP.
2006 £50,000
• Number of persons needed for set up: 2 persons min. • May trade immediately? No, due to Listing Rules.
• Expenses when setting up: Low costs but must pay legal fees for • Privacy? No privacy due to filing requirements
Partnership Agreement. • 1 person or more? No, min. 2 directors are necessary
Requirements: Private company Public company
1. Registration fee + Incorporation document Name s.59(1) Must end in s.58(1) Must end in ‘Public
2. Legal fees for setting up Partnership Agreement ‘Limited’ or ‘Ltd’ Limited Company’ or ‘Plc’.
3. Printing of LLP stationery
• On-going expenses after the business is set up: Min number of ss.7(1) and s.8(1) 1 ss.7(1) and s.8(1) 1
2008 Regs Accounts must be prepared by accountants annually. LLPs shareholders
that do not qualify as ‘small’ must file audited accounts. Min amount of No minimum share capital, s.586 and s.763(1) Must
SBEEA 2015 File a Confirmation Statement min. once a year. share capital so it could be incorporated have a share capital with a
Higher costs due to regulation and disclosure rules. with just 1 share of 1p. nominal value of min.
s.8(1)(b) Must have at least £50,000, of which at least
• Management structure of the business: Apart from a few default 1 share 1/4 must be paid up.
provisions, the LLPA and regulations leave matters of governance to a Min number of s.154(1) 1 s.154(2) 2
partnership agreement – if one exists. There is therefore nothing about directors
calling of (or procedure at) meetings. Pros of an LLP (along with limited Company s.270(1) may choose to s.271 Must have a
liability) is the few formalities for management procedures. secretary have a company secretary company secretary.
• Methods of financing: LLP can borrow and create floating charges. f but it is not obliged to have
any financing is underwritten by a member’s personal guarantee, one. s.273(2) the person
limited liability is removed. Cannot raise finance by issuing shares. appointed to that post
• Liability: Different types of partners - General partners (unlimited s.270(3)(b) There is no must have the requisite
liability) + Limited partners company secretary, the knowledge and experience
directors (or any person the and hold one of the
• Legislation: directors authorise) may do qualifications specified in
1. LLPs Act 2000 anything that the secretary this section.
2. LLPs Regulations 2001 Default provisions on capital and profit is authorised to do.
share between members.
3. LLPs (Accounts & Audit) (Application of Companies Act 2006) Certificate s.15(4) Certificate of s.15(4) Certificate of
Regulations 2008 Set out accounting requirements. required incorporation. incorporation.
4. LLPs (Application of CA 2006) Regulations 2009 apply the CA 2006 before start of
to LLPs, e.g. must have a register of charges and file an annual trading Can commence business as s.761(1)(2) Cannot
confirmation statement. soon as incorporated. commence business until a
trading certificate is issued
• Publicity: No privacy. Similar disclosure to companies: by Registrar showing that
1. Registered office the company allotted
2. Details of members share capital is not less
LLPs can, for a fee, keep registers of members, directors, than the minimum.
secretaries and charges at Comp. House. Annual general Need not have to hold an s.336 Must have min 1
3. Details of ‘designated members’ meetings AGM although they can annual general meeting
4. LLPs need to keep a PSC Register disclosing all persons of hold 1 if they want to. each year.
significant control. Method of s.582(1)(2) No restriction s.593(1) Payments in cash
5. Disclosing details of certain invoices and payment practices payment and on method of payment. only or where
minimum Shares can be issued consideration has been
• May trade immediately? No, as LLPs must be registered. amount without immediate independently valued.
payable for payment. s.586(1) 25% of nominal
share capital value must be paid on
Companies Limited by shares allotment plus the whole
of any premium
A company has a separate legal identity from that of its owners. The company Regulation CA 2006 Public companies are able
may therefore own property, enter into contracts, sue and be sued in its own to offer their shares to the
name. The owners of shares in the company are known as shareholders or s.755(1) Prohibited public so they are subject
members. to a higher level of
• Number of persons needed for set up: s.7(1) CA 2006 Min. 1 person regulation than private
• Expenses when setting up: Higher set up costs as there will be legal companies.
costs incurred in dealing with the company’s constitutional documents, FSMA imposes
etc., as well as incorporation fees due to Companies House. considerable other
• On-going expenses after the business is set up: Accounts must be restrictions
prepared by accountants annually. High on-going administrative costs
(More than LLPs) because of the greater regulation and disclosure
rules.
• Management structure of the business: Meetings of the directors and
the shareholders are held in accordance with the provisions of the CA
2006 and the articles. Companies can adopt their own tailor made
articles instead of the model articles.
BLP – All chapters – Revision notes | Page 3 of 36
, CONFIRMATION STATEMENT:
Min. once a year, companies must ‘check and confirm’ that the
information held about it at Comp. H. is up-to-date, by filing an annual
confirmation statement.
ss112A and Part 2A CA 2006 (ss.128B-J, 161A, ss.167A-E, 274A, ss.279-
E, 790W) A private company may elect to hold more detailed
information on a central register maintained at Comp. H. Those who
opt-in to the central register need not maintain their own statutory
registers in-house.
PEOPLE WITH SIGNIFICANT CONTROL:
Part 21A CA 2006 PSC regime: applies to all companies except listed
companies. Where the owner/controller of a company is a legal entity
such as a company or LLP, that legal entity will need to be put on the
PSC register if it is a registrable relevant legal entity.
Part 1, Sched 1A CA 2006 A PSC over a company is an individual who
meets at least one of the following:
1. The person holds, directly or indirectly:
• more than 25% of the shares in the company;
• more than 25% of the voting rights in the company;
2. The person holds the right, directly or indirectly, to appoint or
remove a majority of the board of directors of the company;
3. The person otherwise has the right to exercise, or actually
exercises, significant influence or control over:
• the company;
• an arrangement such as a trust, which is not a legal
entity but which meets any of the other specified
conditions in relation to the company, or would do so if
it were an individual.
s.790D CA 2006 Companies must take reasonable steps to identify
their PSCs and RLEs. Failure to do so is a criminal offence. Penalty of a
fine or up to 2 years’ imprisonment.
BLP – All chapters – Revision notes | Page 4 of 36
