Sole trader and partnership

Question 1

Tell about sole proprietorship

Answer 1

Individual who is involved in the management and control of the business. Easy to set up and seize, small entities to take care of. (Not suitable for groups), May not even feature employees as would require knowledge of employment law (small business). Easy set up, no registration requirements

Question 2

Tell about benefits of sole proprietorship

Answer 2

• Privacy (no accounts need to be published, only to tax and bank purposes)
• Entitled to 100% of profits
• Lack of formality (apart from VAT requirement, no administrative requirements except for planning permission or local authority permission)
• Good to register your name for good will purposes, but not required (Part 41 Companies act 2006 - business name requirement)

Question 3

Tell about the disadvantages of sole proprietorship

Answer 3

• Unlimited liability, personal wealth on the line
• Management of the business (if you die, business dies, if you are ill, you are still responsible of the running, labour issues)
• No rights under employment law, no sick pay, no annual leave.

Question 4

Define partnership

Answer 4

“Two or more people coming together for a common, legal business purpose with a view to make a profit”

Question 5

Explain partnership

Answer 5

The partnership is a business vehicle where two or more people run a business together (in some cases restrictions up to 21 partners)

Question 6

Tell about the nature of partnership (3 key elements)

Answer 6

1) Individuals combining skills, capital investment, know-how, expertise and contacts, pooling these resources as a means of selling products or services. 2) You also distribute burdens (sick, holiday). 3) Each partner has a right to participate in the business of the partnership and is an agent of the firm with the ability to bind the firm in law

Question 7

Tell about the Partnership Act 1890

Answer 7

Governs the rights and duties of people or corporate entities conduction business in partnership. Partnership agreement is the key, each partner is entitled to participate in management, get an equal share of profits, and indemnity in respect of liabilities assumed in the course of business and the right not to be expelled by other partners.

Question 8

Benefits of the Partnership act 1890

Answer 8

• Don’t need to be in writing (but if disputes, act is supreme (all divided equally, debts and profits) as no physical proof)
• In Scotland Act (section4.2) Separate legal entity

Question 9

Explain what does separate legal entity means

Answer 9

In Scotland it means that the firm may own property in its own name, and sue and be sued in its own name. Benefits: keeps everything tidy for accounting purposes and at the point when partnership seizes

Question 10

Tell about disadvantaged of Partnership Act 1890

Answer 10

• Unlimited liability (debts of the partnership are personal debts)
• Jointly and severally liable
• Over rules oral agreements which might have benefitted one party more

Question 11

What duties do the partners have?

Answer 11

Act as an agent for the business, unlimited liability, Fiduciary duty and duty of good faith, Disclose so no conflict of interest, must account any benefit received by them, rightful accounting,

Question 12

Tell about sharing gross profits case Cox v Coulson

Answer 12

Defendant arranged performance in his theatre with one Mill, who provided actors and scenery, Defendant provided the theatre and lighting. Playbills were proportioned between them both
Plaintiff was struck by a pistol during performance who then sued defendant
Issue: Whether defendant was a partner with Mill, who was in charge of the actors
Held: Defendant not a partner s5 For partnership to exist the net profits should be shared, not the gross receipts Not partnership

Question 13

Tell about the relationship between partners and third parties

Answer 13

• Every partner is an agent of the firm
• Partners have powers to bind the partnership in the contract with third parties where the partner engages in acts “for carrying on in the business of the kind carried on by the partnership”. (The third party needs to know partner has authority for this, and is the partner does not have authority or third party is unclear are they partners, the firm will not be bound.)

Question 14

Tell about wrong omission

Answer 14

Any wrong or omission committed by a partner in ordinary course of business has the same effect as if every partner had committed it - partnership is jointly and severally liable to third parties.

Question 15

Tell about partnership property

Answer 15

-If any property is purchased with the money of the partnership or on accounts of the partnership in the ordinary course of business, such property is owed by partnership (Section 20(1))

Question 16

Tell about the relations of partners to one another and the internal affairs of the partners

Answer 16

• Bound to produce true accounts and full information on all things related to the partnership and other partners. (cannot exclude information)
• All partners must account for any benefit derived by them to other partners; including any use of the partnerships property

Against secret profits, partners must not compete with the partnership, ask for approval

Question 17

Tell about partners unlimited liability

Answer 17

Equally shared profits and losses of the firm, the firm must indemnify every partner with regard payments and liabilities incurred by a partner. (If you use personal wealth for momentary payment, you are entitled to remuneration over the expenses).

Question 18

Tell about running of the business in a partnership

Answer 18

Every partner is entitled to take an active part in the running of the business, and no new partner cannot be introduced without consent of all the existing partners. Make everything clear, what who when, and you cannot force a business, needs to be unanimous decision. Disputes are to be decided by majority vote and all partners have rights to inspect the books at any time.

Question 19

Tell about the dissolution of partnership

Answer 19

Unless otherwise stated, any partner may dissolve the partnership at any time on giving notice of such intention to all the other partners. Some partnerships may have a fixed term duration, and they’ll automatically cease to exist upon the relevant date.

Question 20

Tell about death related dissolving of partnership

Answer 20

Should any partner die (or become bankrupt) the partnership is automatically dissolved. Same in the case of illegal conduct, so it becomes no longer practicable to be carried on, it can be dissolved in the court.

Question 21

What happens to the partnership in monetary terms at the moment of dissolving?

Answer 21

Losses are paid out of profits, then capital and eventually by the partners themselves.
Order is:
1) Debts and liabilities to non-partners
2)Any advances made by partners
3) Percentage of capital contributions by the partners
4) The residue according to the distribution of profits agreement.

Question 22

Tell about the limited partnership

Answer 22

One of more of the partners do not take an active part in the running of the business of the partnership, referred as ‘sleeping partners’.

Question 23

Tell about The Limited Partnership Act 1907

Answer 23

Under the Act such a partner only contributes capital and has the right to inspect the books of the partnership but not receive any profits till the end of the partnership and may not be involved in the running of the business. At least;
One general partner
One Limited partner

Question 24

Tell about the General Partner in Limited Partnership

Answer 24

Full limited liability - all duties and obligations of a regular partner under the Partnership Act

Question 25

Tell about the Limited Partner in Limited Partnership

Answer 25

Limited liability, only liable for the capital investment, personal wealth is safe by all means. Cannot be involved in the running of the business nor receive any profits till the dissolve of the partnership. Can view the books whenever. (IF takes any part, even for a short period of time, loses the protected status and reverts to unlimited liability)

Question 26

AQ: What are the benefits and disadvantages of being a sole trader?

Answer 26

p. 24

Question 27

AQ: What are the disadvantages and advantages of a partnership?

Answer 27

Revise if unsure

Question 28

AQ: Define partnership

Answer 28

Revision is the key

Question 29

AQ: What is meant by the “separate legal personality” of a partnership under Scots Law?

Answer 29

p. 24

Question 30

AQ: What are the duties and rights of a partner in a partnership

Answer 30

p.25

Question 31

AQ: When is it possible for the actions of a partner not to be legally binding upon the partnership?

Answer 31

p. 25

Question 32

AQ: What is meant by ‘joint and severable’ liability?

Answer 32

P.25

Question 33

AQ: How is a limited partnership different from a partnership?

Answer 33

Revision helps to remember!