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Business Law - 2 - General Partnerships - Coggle Diagram
Business Law - 2 - General Partnerships
Formation
Two or more persons
carrying on a
business in common
with a
view of profit
Doesn't have to actually make a profit as long as that's the aim, otherwise not a partnership
Persons can include corporations/other business entities
Business =
buying or selling goods, or providing services for a fee
In common = people are
conducting operation together
- each have a right to make
decisions about the business share in its gains, etc
Simply describing it as a partnership does not make it so
No formalities required
(eg nothing with Companies House)
Presumption of intended partnership
(by Courts) if a party
receives
share of profits
of a
business
Presumption rebutted by:
Receipt of profit being
repayment of a debt
Receipt constitutes
remuneration
of an
employee or agent
Eg sandwich shop agreeing to pay manager 10% of profits
Receipt constitutes
annuity to a survivor
of a partnership on account of partner's share of the profits, or to a
person who has sold the goodwill of the business
Eg if a former partner has passed away, the
surviving spouse or heir might receive a share of profits
from the business as part of their
inheritance or as an annuity
, but this
does not mean
that they are now a partner in the business.
Annuity = fixed sum of money paid to someone each year, typically for the rest of their life
Goodwill is the reputation or intangible value of a business. When someone sells the goodwill of a business, they might receive a share of profits as part of the sale agreement.
For instance, if a previous owner sells their business (including its goodwill) to a new owner, they might receive a portion of the profits for a certain period. This does not make them a partner in the business—they are merely receiving payment for the sale.
Loss-sharing
Lack of agreement on loss-sharing
does not disprove the formation of partnership
However, loss-sharing agreement can count as proof intention to form a partnership
Other circumstances not creating a partnership
Mere fact
two or more people jointly own property
, EVEN IF they
agree to share profits from the property
Sharing of gross returns does not in itself create partnership
Sharing of gross returns means splitting the total revenue before expenses are deducted. It does not, by itself, indicate a partnership because it doesn't show that the parties are jointly running a business or sharing profits and losses
No contribution of money/property
required
No limit on numbers of partners
General Partnership
does not have a separate legal personality from its owners
Thus, partners in partnership have
unlimited personal liability for debts of the partnership
Partners and Authority to Bind the Firm
in
contract
or
tort
(default rules)
Based on principles of Agency law, as Partnership Act says every partner is an
agent of the firm
and
of other partners
Can bind only if acting
with
Authority
-
Actual Authority
or
Ostensible/Apparent Authority
Actual authority
Bound by any act done in a way
showing intention to bind the firm
, by
any person with Authority
by the firm
to undertake the act
Express actual authority
Eg
Partnership agreement
says X partner has the authority to buy business goods for the partnership
Eg
Partners **
vote** to give X partner authority to do a specific act
Implied actual authority
Partners
have allowed a partner without express actual authority to do an act
Ostensible/Apparent Authority
Will
bind
the firm and other partners if:
Carrying on in the USUAL WAY business OF THE KIND the firm USUALLY carries on
Unless
BOTH conditions are met
The partner
had no authority to act
(express or implied);
AND
The person who the partner was
dealing with
either
KNEW the partner had NO AUTHORITY to act
,
OR
,
Third parties
can assume partners have authority in the normal course of the partnership's business
to**
5 more items...
Did NOT KNOW OR BELIEVE
the person they were dealing with
WAS A PARTNER
Test for usual way of business of kind firm carries on is:
Would a
reasonable third party think a business of this kind
would usually do this act
What authority
would a
reasonable third party
expect a partner in such a firm to have
**
However, note in unfair binding other partners can sue the partner who acted to get damages from breach of partnership agreement (eg if they spent £5000 when they were authorised to spend over £1000, the partners
could recover £4000!
(NOT £5000!!)
If there is no authority and the conditions are met for the partnership to not be bound,
only the Partner is bound
, and is liable for breach of warranty of authority
Partners have
unlimited personal liability for the debts of the partnership
if the partnership itself is
unable to pay its debts out of partnership property
Creditors
can pursue
any partner
or
all the partners
for
ALL of the debts
Similar for tort - if any partner acting in the ordinary course of the business,
OR with the authority of other partners
,
commits a tort
, the partnership is liable to the same extent as the partner, and
partners' liability is joint and several;
Example of Liability:
Scenario: A, B, and C are partners in a stock brokerage firm.
Wrongdoing: A converts (tort of conversion) a customer's securities for personal use without the knowledge of B and C.
Outcome: B and C areliable for the conversion because it occurred while she was a partner, even though she had no knowledge of it.
Example of no liability:
Scenario:
Same partners, but the partnership business has nothing to do with securities
.
Wrongdoing: A converts a customer's securities without the authority to receive them.
Outcome: C is not liable because the partnership was not related to securities, and A had no authority to handle them.
Liabilities of Incoming and Outgoing Partners (Debts, etc)
Default rules:
No partner
may be added
to a partnership without
the consent of all existing partners
Partners
cannot expel another partner
unless this is expressly agreed
by the partners (eg in the partnership agreement)
New Partners
ARE NOT LIABLE FOR PAST DEBTS
(unless agreement says otherwise)
Outgoing partners - debts incurred
BEFORE retirement
If a partner
leaves a firm
and it
continues
(remember, by normal rules the partnership dissolves if even 1 partner leaves)
By default,
Partner REMAINS LIABLE for EXISTING debts and obligations.
Retiring
partner and
firm
can agree partner will
not be liable to firm for these obligations
Done via a
'Hold Harmless agreement'
- firm
indemnifies
retiring partner for
liabilities
Hold Harmless Agreement has
no effect on retiring partner's liability to third parties
- this can only be changed via
novation
(new agreement with third party's consent)
Outgoing partners - debts incurred
AFTER retirement
Remains liable (including for 'new' debts even after they retire) until
notice given
ACTUAL NOTICE
should be given to
EXISTING CREDITORS
- eg
email/letter
NOTICE BY WAY OF ADVERTISMENT
is required for
NEW CUSTOMERS
via an ad/notice in the
LONDON GAZETTE
Note: if a partner retires and they were not known to a person dealing with the partnership as a partner (that they were a partner), they're
not liable for partnership debts with that person
after the date of their retirement
Remeber, a
partner can leave at any time
- they only need to do the gazette and actual notice thing if they want to not be liable for future debts
Person 'Holding themselves Out' as a partner even if they are not one
Application
If someone
represents themselves as a partner
in a firm, even though they are not, they can be
held liable to any third party who has given credit
to the partnership based on this
representation
.
Liability applies even if the person knowingly allows someone else to present them as a partner.
"Given Credit":
The term "given credit" has a broad meaning, extending beyond loans to include things like goods being supplied.
Retiring Partners:
Retiring partners must give proper notice to existing and new customers.
If they fail to remove their name from notices, websites, or stationery, they can still be held liable as if they were a partner.
Example
Scenario:
A, B, and C are partners in a textile manufacturing business.
C asks their rich relative D to negotiate a deal and pretend to be a partner of the ABC partnership.
D is not actually a partner but represents herself as one.
The supplier (S) sells cotton to the firm on credit, relying on the representation that D is a partner.
Outcome: S may hold D liable for the firm’s debt, treating her as if she were a partner.
Similar Case: If C made the representation and D knew about it and allowed it, D would still be liable.
Partnership property
- partners often fund or supply goods to the firm, eg equipment or premises, upon its creation
Property belonging to a partner individually remains that partner's property after the firm's dissolution
Property
given by a partner to the firm
becomes
partnership property
Constitutes a
capital contribution to the firm by the partner
(capital accounts are kept for each partner to keep track of their share of contributions, profits, or losses)
Statutory Definition
Partnership property = property
originally brought
into
the partnership;
OR
Acquired for partnership purposes
in the
course
of
partnership
business
Unless a contrary intention appears, property bought with
firm money is partnership property
, and
property titled in the firm name is partnership property
INTENT MATTERS IN DETERMINING IF SOMETHING IS PARTNERSHIP PROPERTY
Whether property brought into the partnership becomes PP or remains property of the individual partner
depends on the intention of the parties
Property
owned by one partner at the start
of the partnership will be
treated as partnership property only if it is expressly or impliedly agreed between the partners
So, EVEN IF THE PARTNERSHIP PAYS MAINTENANCE FEES, UNLESS IT WAS EXPLICITLY STATED THE PRODUCT WOULD BE PARTNERSHIP PROPERTY, IT IS NOT!
NEED
EXPRESS AGREEMENT
Must be held and applied by the partners
exclusively for the purposes of the partnership
and
in accordance with the partnership agreement
Partnership property cannot be used to pay off individual partner's debts by their creditors
However, creditor can apply for court order to charge partner's interest in firm, giving them the right to receive any distributions owed to the partners
Financial Entitlements
In the absence of a specific agreement,
capital and profits are shared equally among partners
, even if the partners contributed capital unevenly
Losses are also shared evenly
However, if there's an agreement to
share profits in a certain ratio, this ratio applies to losses too
Partners have no right to distribution of a firm's profit and capital unless:
Agreed by the partners to distribute; or
Dissolution fo the firm
Partners can
assign
their share of the profits to someone else, but this does not give the assignee any other rights
Partnership books
Must be kept at
principal place of business
All partners have a right to inspect and copy them as they see fit
Maintain financial information about partners and firm
Partners are not entitled to remuneration for their work in the firm
Nor are they required to work a specific amount, and cannot be forced to do so
However, partnerships
can make provisions
by
agreement
to pay partners a salary if they eg manage the business
Compulsory Indemnity from Partnership for Partners
Partnerships must
indemnify their partners
for
any payments
made, or
liabilities incurred
, whilst
acting in the course of the business of the partnership
, or for anything else done for the
preservation of the business or property of the partnership
Partnership Management
Basic (changeable) rule per Partnership Act is
one partner, one vote
, regardless of capital contributions, work done, etc
Decisions typically require only
MAJORITY APPROVAL
, apart from:
Unanimous agreement needed for:
Admission of a
new partner
Change
in the
nature of the partnership business
significant alteration in the type of business activities or scope that the partnership originally agreed to engage in
Alteration to partnership agreement
Remember,
expulsion of a partner
is impossible (as
unanimous vote
needed and person won't vote against themselves)
unless a prior agreement to the contrary exists
Duties of the Partners
Fiduciary duty to each other
(common law)
They must act in the best interest of the partnership, avoiding actions that could harm the partnership’s business or reputation.
Required to act in Good Faith
AND
exercise their powers in the benefit of the partnership as a whole
Fiduciary = relationship of trust and confidence
Duty to disclose information on all things affecting the partnership
Both to any partner; and
To any partner's olegal representatives
Duty to
account
for
secret profits
(disclose and return those profits to the partnership or the other partners)
Every partner must account to partnership for
any profit or benefit obtained
without the consent of other partners
or
any use of the partnership name or property
by the partner
from any transaction concerning the partnership
; OR
any use of the partnership name or property
by the partner
Must receive consent of all partners and tell them if he wants to keep the profits for himself
Includes any business that came to partner because of their involvement with the partnership
Partner's COMPETING business - must account to partners
If a partner (without consent of other partners),
carries on any business IN COMPETION with the partnership
, they
MUST
ACCOUNT TO THE PARTNERSHIP
for
ALL PROFITS made
in that
business
Dissolution of a Partnership
(Automatic) Dissolution without Court involvement
If partnership is made for a
specific time
(eg 5 years)
If partnership is made for a
specific enterprise
Eg partnership to sell drinks at Glastonbury; partnership automatically ends when Glastonbury ends
Dissolution
at will
by notice in partnership
If a partnership is
NOT
set up for a fixed term, then:
Partner can withdraw at any point by
giving notice
to other partners
Dissolution occurs either on date of communication of notice, or, if set out in the notice, the date the partner sets
Dissolution by
bankruptcy, death, or charge
Partnership is
dissolved
by
DEATH
OR
BANKRUPTCY
of any partner
If a partner
CHARGES their SHARE of the partnership property for a personal DEBT
Partners may
dissolve the partnership if so desired
When a partner charges their share of partnership property for a personal debt, they use their
ownership interest in the partnership as collateral for a personal loan
. This can lead to dissolution of the partnership, as it may disrupt the business and involve outside creditors.
Different from when a partner
assign the right to their share of partnership profit distributions
- doing that is ok
Dissolution with Court involvement
-
a
partner
MAY
APPLY FOR DISSOLUTION
) for a Court order for a partnership to be dissolved if (under Partnership Act):
Permanent incapacity of a partner
Partner becomes permanently incapable for performing their part of a partnership contract
Prejudicial conduct of a partner
Partner is guilty of conduct that would
prejudicially affect the carrying on of the business
, with
regard to the business's nature
Eg setting up business in competition or criminal conviction
Wilful or Persistent Breaches of Partnership Agreement
Wilful or persistent
breaches of partnership agreement
, or otherwise
conduct
from a partner
that
means it is
not
reasonably practicable
for the
other partners to carry
on in partnership with them**
When the business can be carried only at a loss
As partnerships exist with a view for profit
Just and Equitable basis
If cirucmstances make it just and equitable to dissolve a partnership, the Court may do so
Eg in
deadlock
situations where there are
fundamental differences of opinion
between partners and they
cannot move forward
Mental Capacity Act 2005 dissolves any partnership where court considers a partner does not have
mental capacity
(specifically mental - physical OR mental incapacity is by contrast dealt with under Partnership Act rules).
Effect of Dissolution
Dissolution -
Partner authority to bind
Partners' authority to bind the firm
continues
in order to wind up the partnership
AND
complete transactions begun but unfinished at time of dissolution
Distribution of partnership property and creditors
Partnership assets are
first used to pay off the partnership's debts
Losses shall be paid
first out of profits
, then
capital
, then, if necessary, by
partners individually in share of profits they're entitled to
If
partnership assets
are
insufficient
to pay creditors, partners are
personally liable for any shortfall
If
assets
are sufficient to pay creditors, any
remaining assets
are used
FIRST to repay advances any partner has made to the firm
(that is,
to REPAY ANY LOANS PARTNER HAS MADE TO PARTNERSHIP
)
Advances refer to
loans or additional funds
that a
partner has personally lent to the partnership.
These funds are
separate from the partner's capital contribution
and were provided to cover partnership expenses or operations, and are treated as
debts the partnership owes to the partner
If assets remain after loans are repaid, they are used to
return the partner's contributions
(if contributions haven't already been repaid)
Contributions
refer to the
capital that each partner originally invested in the partnership
when it was formed (or during its operation) - it's their INVESTMENT
don't confuse this with loans, as the partner can be
entitled to get a loan back at a specific time
from the partnership (eg 1 year), whilst
contributions can only be returned either when the partnership is dissolved
or if the
partners decide
to
distribute
surplus capital
If assets
still remain
after repaying contributions, they will be
divided among partners based on share of profits they're entitled to
(equal if absent a profit-share-fixing agreement)
IMPORTANT - ASSETS are used to pay off creditors first, then contributions, then partners are personally liable for rest!!
Taxation
Governed by Income Tax Act 2007
Each year, each
individual partner must include in their personal income their share of the profit made by the partnership
This applies
REGARDLESS
OF
WHETHER
THE
PROFITS
HAVE ACTUALLY
BEEN
DISTRIBUTED
!!
Each partner then pays tax on that
share of the profit
at their
appropriate personal rate