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Summary LPC Business Law and Practice Notes
- Module
- Business Law And Practice
- Institution
- University Of Law (ULaw)
LPC Summary of Notes for BLP course. Distinction grade.
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PartnershipsChapters 1, 13, 14, 15, 16 and 17 of Business Law and Practice.
Formation of a partnership Partnerships are governed by the Partnership Act 1890.
A partnership occurs when two or more persons run and own a business
together and actually do so.
A partnership may be created:
a) For a specific purpose or for a pre-determined period of time; or
b) so as to continue without reference to duration – a partnership ‘at
will’.
Under S1:
A partnership is legally formed when two or more persons carry on a
business with a view to making a profit. The partnership will be run on the
basic of a contract, which may be written or oral.
The business may carry out any trade.
There are no formalities which need to be satisfied.
The partners will divide the profits or losses of the business between them.
The partners will be taxed separately as individuals paying income tax on
their share of the profits of the partnership.
A partnership has no separate legal status. The partners therefore have
unlimited liability for the debts of the partnership. If the partnership fails,
creditors pursue not just the assets used by the business, but the personal
assets of the partners themselves. This liability is joint amongst the partners
allowing any creditor to seek the full amount of a debt from any one
individual partner or from all the partners together.
The persons in the partnership would usually be people, but they could be
two more companies.
Fundamental characteristics Typical rights and responsibilities include:
a) the right to take part in making decisions which affect the business
or the business assets,
b) Share the ownership of the assets of the business,
c) Share the profits from the business,
d) The right to examine the accounts of the business,
e) The right to insist on openness and honesty from fellow partners,
f) The right to veto the introduction of a new partner,
g) Sharing unlimited liability for any debts or losses made by the
business.
Formalities required by statute Business names - where SS1192-1206 of the CA 2006 apply, there are
controls over the choice of partnership name, and requirements as to the
names and business address of the partners.
Other statutory obligations may arise at the start of a partnership are not
peculiar to partnerships and may arise at the start of any business. These
include obligations concerning income tax, VAT and National Insurance.
A partnership has the additional obligation of notifying HMRC of the
identify of its partners.
Use of a partnership in joint Partnership may be a suitable vehicle for a group of individuals to engage
ventures in a business venture together because of the informal nature of
partnerships, the commercial secrecy that is possible, and the ability for the
partners to claim tax relief for start-up losses.
Partnership agreement S24 if the Partnership Act 1890 contains a number of provisions
concerning the running of the partnership that will be implied into a
partnership agreement in the absence of express provision.
The length of the agreement will depend on the imagination and
thoroughness of the partners and their advisers.
, The existence of a partnership is established when the statutory definition
in S1 of the PA 1890 is satisfied.
The name of the partnership should be stated since this means that it is
fixed, and any partner can insist as a matter of contract on there being no
change to it.
Both names should be stated in the agreement,
Each partner is likely to be putting in capital into the business. The
agreement should state how much capital each partner is contributing, and
possibly deal with the question of future increases in contributions.
Partners may be content to share income profits of the business equally.
Any losses will also be shared equally.
Salaries of differing fixed amounts might be appropriate before any surplus
profit is divided between the partners.
Interest may be allowed on partners’ capital contributions, again before any
surplus profit is divided between the parties.
A suitable ratio in which the profits remaining after salaries and interest on
capital are to be shared should be stated.
The agreement may contain clauses which describe the premises at which
the business will be carried on, the geographical area of its operations and
the nature of the business which will be carried on.
The PA 1890 will imply a term into a partnership agreement, in the absence
of a contrary agreement, that all partners are entitled to take part in the
management of the business, albeit without any obligation to do so.
Partners may have differing functions within the partnership so that not
only must they agreement describe the amount of work input, but also each
partners function.
Unless the agreement provides to the contrary, all decision making is to be
done on the basic of a majority, except the decision on changing the nature
of the business or on introduction of a new partner as these changes
requiring unanimity.
If there is no provision in the agreement regarding when the partnership
should be dissolved, the partnership can be dissolved at any time by any
partner giving notice of the others. This is known as a partnership at will.
It is appropriate to add a further provision that on the death or bankruptcy
of one of the partners, the remaining partners will automatically continue in
partnership with one another or buy the other partner’s share in the
business.
There may be a provision of non-competition – commonly used to restrain
an ex-partner from being involved in any way with a competing business.
Partners responsibilities By common law, partnership is a relationship onto which is imposed a duty
of the utmost fairness and good faith from one partner to another.
SS28-30 of the Partnership Act 1890:
- Partners must divulge to one another all relevant information
connected with the business and their relationship.
- They must be prepared to share with their fellow partners any profit
or benefit they receive that is connected with or derived from the
, partnership, the business or its property without the consent of the
other partners.
- 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 parties.
Liability for the firm’s debts Transactions which may affect a partnership generally involve contracts.
Contracts may be made by all of the partners acting collectively.
Some or all of the partners may seek to dent that they are liable on the
contract. In such cases, it is necessary to first identify whether the firm
itself is liable and then, if the firm is, to identify which individuals are
liable.
- Power of partner to bind the firm.
- Partners bound by acts on behalf of the firm.
- Effect of notice that the firm will not be bound by acts of partner.
The firm will be liable for actions which were actually authorised. An
action may be authorised if the partners have acted jointly in making the
contract, if they have expressly instructed one of the partners to represent
the firm in a particular transaction, or if the partners have impliedly
accepted that one or more partners have the authority to represent the firm
in a particular type of transaction.
The firm may be liable for actions which were not actually authorised, but
which may have appeared to an outsider to be authorised.
This liability derives from application of the principles of agency law.
In any of these instances, the partner who has acted will be personally
liable to the other party under the contract.
In the case of tortious liability:
S10 makes the firm liable for any wrongful act or omission of a partner
who acts in the ordinary course of the firm’s business or with the authority
of his partners.
- Liability of the firm for wrongs.
- Liability for wrongs joint and several.
The person who is seeking to enforce a liability of the firm or who is
seeking to claim damages for breach of such contract will want to be sued.
A creditor can sue the firm as a group of persons or can sue individually
any of the persons liable as partners.
If the partner cannot pay out, judgement against the firm can be enforced
against the private assets of any person liable as partner.
Dissolution of a partnership Dissolution is when a partnership end. This may be by agreement between
the parties or by circumstances that had not been anticipated. A partnership
dissolves on the expiry of a fixed term for which the partners have agreed
to continue in partnership.
Under S33 of the Partnership Act 1890, unless there is a contrary
agreement, the death or bankruptcy of a partner will automatically cause
dissolution of the entire partnership.
S26 of the Partnership Act 1890 provides that a partner can retire by only
for a partnership at will by dissolving the partnership.
, If a partner dies or retires, he will usually be bought out by the remaining
partners so that the partnership continues. If this is not agreed the
partnership will end.
Expulsion of a partner is analogous to retirement, save that expulsion
happens at the instigation of the other parties while retirement is a
voluntary act of the outgoing partner. This amounts to terminating the
partner’s contract without their consent.
Where a person ceases to be a partner by reason of retirement, expulsion,
death or bankruptcy, and others continue in partnership together, the
remaining partners will need to pay for the outgoing partner’s share in the
business.
There will be no implied term preventing an outgoing partner from setting
up in competition with the partnership or joining a rival business or even
poaching the employees of the partnership to work in the rival business.
Each partner has the continuing authority to act for the purposes of winding
up the firm’s affairs.
Limited Partnerships Established under the Limited Partnerships Act 1907.
A limited partnership is similar to a partnership in that there must be at
least one general partner who has unlimited liability for all the debts of the
partnership. However, a LP is permitted to have a limited partner whose
liability is limited to the amount that he initially invested in the business.
The limited liability of the limited partner is conditional on his:
a) Not controlling or managing the LP,
b) Not having the power to take binding decisions on behalf of the LP,
and
c) Not removing his contribution to the LP for as long as it is in
business.
If the limited partner breaches any of these rules, then he will lose the
protection of limited liability and be treated as a general partner with
unlimited liability.
There has been a more recent use of LPs for certain financial businesses.
LPs must register with the Registrar of Companies in accordance with S8
of the LPA 1907. Once successfully registered, a certificate of registration
will be issued and sent to the general partner or partners. The LP will come
into existence on the date of registration on the certificate.
Since 2007 it has been possible to set up a PFLP (Private Fund Limited
Partnership). This is only available to private investment funds which do
not deal with the public.
Contractual co-operation It is possible for two or more parties to run a business together on the basic
of a co-operation agreement.
The parties would enter into a simple agreement, for example:
- To explore and develop oil and gas fields;
- In property development, or
- To conduct R&D with a view to developing new products.
Such agreements are sometimes called joint ventures.
Limited Liability Partnerships An LLP is formed under the Limited Liability Partnerships Act 2000. It is
basically a hybrid between a partnership and a limited company.
It has a separate legal personality from its owners like a company and it
offers its owners protection from liability of a limited company.
LLPs can be formed only be two or more members carrying on a lawful
business with a view to profit. They cannot be set up by individuals or non-
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