Chapter 6: Partnership

Question 1

Are capital and income profits and losses shared equally irrespective of the hours the partner works?

Answer 1

Yes

Question 2

When a member leaves an LLP, when must the LLP notify Companies House?

Answer 2

Within 14 days of the member leaving

Question 3

Can an LLP change the nature of business by majority agreement?

Answer 3

No, unanimous consent is required

Question 4

Do the LLP Regulations 2001 provide that members will share equally in capital and profits?

Answer 4

Yes

Question 5

Do the LLP Regulations 2001 provide that every member may take part in the management of the LLP?

Answer 5

Yes

Question 6

If a new member joins an LLP how soon must the LLP deliver a notice to the Registrar of Companies?

Answer 6

Within 14 days of appointment

Question 7

Are LLPs required to register charges with the Registrar of Companies?

Answer 7

Yes

Question 8

Is a majority decision required for an LLP to change its name?

Answer 8

No, an unanimous decision is required

Question 9

What is the minimum number of members than an LLP can have?

Answer 9

There must be at least 2 members on incorporation and at least 2 designated members who are responsible for filing documents at Companies House

Question 10

If a person has held themselves out or allowed themselves to be held out as a current partner, can the person who relied on that holding out be able to sue that person for the debt owed by the firm?

Answer 10

Yes

Question 11

In order to escape liability for future debts, what must a retiring partner do?

Answer 11

1. Give actual notice to anyone with whom the firm has dealt (regardless of whether there are no outstanding debts)
2. Give notice via the London Gazette (for those who the company has not had any dealings with)

Question 12

What is the effect of a novation agreement?

Answer 12

A retiring partner is released from existing debt by entering into a contract with the creditor and other partners (possibly also an incoming partner). The effect of the novation agreement is that the creditor releases the original partners from their liability

Question 13

In order for a restraint of trade clause to be enforceable, it must satisfy two conditions. What are these?

Answer 13

1. The condition must protect a legitimate business interest
2. No wider than is reasonable to protect that interest

Question 14

Does the Partnership Act create an implied restraint of trade clause in contracts?

Answer 14

No

Question 15

In what order are proceeds of sale applied when a partnership business is sold?

Answer 15

1. All creditors of the firm must be paid in full. Any shortfall must be made up using the partners’ own private assets
2. Partners who have lent money to the firm
3. Capital
4. Any remaining surplus is distributed according to the partnership agreement

Question 16

Under the Partnership Act, can an outgoing partner insist on the business being sold?

Answer 16

Yes, the effect of this is that an outgoing partner will not necessarily have the option of continuing in business

Question 17

What is the effect of dissolution?

Answer 17

The partnership must end, all assets must be sold (or the partnership sold as a going concern) and the outgoing partner must receive their share

Question 18

In what five circumstances can partners apply to the court for an order that the partnership is dissolved?

Answer 18

1. Partner becomes permanently incapable of performing their part of the partnership contract
2. Partner’s conduct is prejudicial to the business
3. Partner wilfully or persistently breaches partnership agreement
4. Partnership can only be carried on at a loss
5. The court thinks that it is just and equitable to order that the partnership be dissolved

Question 19

Under what five circumstances will a partnership be dissolved?

Answer 19

1. When a partner retires
2. On expiry of a fixed term
3. By the death or bankruptcy of any of the partners
4. If the partners give notice of dissolution to a partner who has granted a charge over their share of the partnership property for a debt owed by them alone
5. If something happens which makes it illegal for the business to be carried on

Question 20

What is retirement?

Answer 20

When a partner leaves a partnership

Question 21

Does notice to end a partnership need to be written?

Answer 21

No, notice need not be in writing. The partner can the the partnership with immediate effect by merely stating to the other partners that they wish the partnership to end

Question 22

When will a partnership at will come to an end?

Answer 22

A partnership at will continues indefinitely until notice is given

Question 23

What is the default position in respect of dissolution?

Answer 23

Any partner may end the partnership at any time by giving notice of their intention to do so to all other parties

Question 24

If a partnership is dissolved, has it ended?

Answer 24

When a partnership is dissolved it can be described as having ended. However, that does not necessarily mean that the partners will stop trading

Question 25

Can the terms of a partnership agreement be changed by majority decision?

Answer 25

No, a unanimous decision is required

Question 26

Can a new partner be added to a partnership by majority decision?

Answer 26

No, a unanimous decision must be reached

Question 27

Can the nature of a partnership's business be changed by majority decision?

Answer 27

No, a unanimous decision is required

Question 28

If partners enter into a fixed term partnership agreement, the partnership will end. What will happen if the partners decide to carry on the business after the expiry of the fixed term without entering a new agreement?

Answer 28

They are presumed to be partners on the same terms as before

Question 29

A partnership which continues indefinitely until notice is given under the PA 1890 is known as a partnership at will. Does notice need to be a certain length of time?

Answer 29

No, there is no requirement for notice to be a certain length of time or for the notice to be in writing

Question 30

Can a partner end a partnership with immediate effect?

Answer 30

Yes, they can do this by merely saying to the other partners that they wish the partnership to end. The effect of this is that the partnership will automatically be dissolved

Question 31

What money will a partner receive upon retirement?

Answer 31

The outgoing partner must receive their share. An outgoing partner can insist on the business being sold under s 39 PA 1890, so the other partners do not necessarily have the option of continuing in business and just paying the outgoing partner for their share

Question 32

If a partner retires, will they be entitled to interest on their share of the partnership?

Answer 32

If the partnership agreement does not address the issue of payment for the outgoing partner’s share, the outgoing partner is entitled to either interest at a rate of 5% per annum on the value of their partnership share until they receive their share from the other partners

Question 33

If one partner retires and the others want to carry on the business, will the outgoing partner be entitled to goodwill?

Answer 33

The retiring partner has a right to their share of all the partnership assets — including goodwill. So the continuing partners must compensate them for that value.

Question 34

What is a going concern?

Answer 34

💡 “Going Concern” = A Business That’s Still Going! The phrase “going concern” doesn’t mean “a concern that’s going down” — it means “a concern that’s going (i.e. continuing)”. In other words, it’s a live, functioning business — not one that’s being shut down. So if a business is described as a going concern, that’s good news — it means it’s healthy, trading, and expected to keep operating in the foreseeable future. So: “going concern” = still trading. “wound up” = business closed.

Question 35

How is goodwill calculated?

Answer 35

Goodwill is difficult to value, but commonly, two years’ profit is taken as the value for goodwill. If the partnership’s assets are sold individually to be used elsewhere, goodwill will not be part of the equation

Question 36

Are partners entitled to remuneration?

Answer 36

Generally, no