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#10113 - Formation Agreement 3rd Party - Business Law and Practice

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There are two main forms of businesses in the UK: page 4
Unincorporated Incorporated
No formal registration Formal registration
Treated as being the same as its owners Legal entity with separate existence from its owners
e.g. Sole trader and Partnership e.g. Limited Liability P’ship, Public LC (PLC), Private LC (Ltd) page 10
Business Advantages Disadvantages
Sole Trader

Very easy to form.

Freedom to run as you like.

All profits are the owner’s.

Unlimited liability for debts.

Lacks ‘incorporated’ status.

No day-to-day support

Partnership

Chap 1, 13, 14, 15, 16, 17

No formalities: very easy to form.

Freedom to run as they like.

Allows commercial secrecy.

Tax-relief for start-up losses.

All profits are the Partners’.

Unlimited liability for debts.

Cumbersome decision making.

Uncertainty w/out agreement.

Cannot create a floating charge.

Apparent authority will bind the firm.
Limited Company

Limited liability for debts.

Greater status.

Potentially many investors.

Must register, formality, costs.

More legal duties & liabilities.

Information is public.

Profits are company’s.

Limited Liability Partnership (LLP)

page 15

Limited liability for debts.

Freedom to run.

Support of joint-decisions.

Must register.

Information is public.

Extra formality and costs.
Decision-making

  • All decisions taken on a simple majority basis (s.24(8))

  • Unanimity is required on two occasions:

    1. Introducing a new Partner (s.24(7))

    2. Change in nature of the business (s.24(8))
Apparent Authority

  • If a Partner has entered into a contract, will it bind the firm?

  • Did the Partner have actual authority? If yes, the firm is bound (s.6)

  • Did the Partner have apparent authority? Yes if: (s.5)

    1. Transaction relates to the business of the firm;

    2. A Partner would normally be expected to have authority;

    3. 3rd P did not know that X had no authority; and

    4. 3rd P knew or believed X to be a Partner?
Rights & Duties

  • Fiduciary duty of utmost good faith

  • Rights to examine the accounts (s.24(9))

  • Share in gross profits and losses (s.24(1))

  • Involved in decision-making

  • Veto the introduction of a new partner

  • Share in profits they make from a competing business (s.29)

  • Insist on openness and honesty
Partnership at Will

  • It can be written or oral

  • It does not deal with duration

  • Must serve notice for dissolution (method of which is determined by whether it was a written or oral partnership) and need no reason

  • It is then terminated immediately
Post-Dissolution

  • Contractual relations between the Partners will end

  • Either broken up and assets sold or it is sold as a going concern (which will be better because you will get more money for goodwill)

  • Proceeds are distributed in the order outlined in s.44

Partnership Agreement

This essentially forms a binding contract between the Partners, the breach of which will permit a breach of contract claim. Under s.19, Partners may be able to alter an existing Agreement to facilitate a buy-out.

Issue Position in PA 1890 Include in the Agreement
Finance All partners share equally in the capital profits and losses of the business (s.24(1))

  • Does one dedicate more time?

  • Should one draw a salary before profit?

  • Should they share proportionately to their capital investment?

  • Should profit-sharing reflect seniority?

  • What will happen at the event of a loss?

  • Monthly limit on drawings?

  • Consequences of exceeding drawings?

  • How will capital be shared if an asset is sold?
Employment All partners may partake in the management of the partnership, but there is no positive duty to do so (s.24(5))

  • How must time should each partner devote?

  • Should this be reflected in a salary?

  • Are they allowed to do other business?

  • What is the position on holiday leave?

  • Do you want to limit a certain partner’s ability to be able to contract on the firm’s behalf or specify roles?
Dissolution & Duration

Dissolved at any time by giving notice to the others (s.26)

Death or bankruptcy will automatically dissolve the partnership (s.33)

There is no provision for retirement of expulsion (s.25)

Notice in writing is only required if the partnership was created by a deed (s.26)

  • Create a fixed-term partnership?

  • Provide for the non-dissolution of the partnership upon death, bankruptcy, expulsion and retirement?

  • Specify notice must be in writing?

  • Specify notice period, e.g. 6 months and not within the first year of trading (to ensure security and stability)

  • Provide for the buy-out of a partner’s share?

  • How will outgoing partner’s share be valued?

  • Restraint of trade clause must be expressly included and must be reasonable (does it protect a legitimate interest and is the clause reasonable to protect that interest)?

  • Provide for dispute arbitration

A 3rd Party Can Sue:

  1. The contracting Partner under the doctrine of privity of contract

  2. The firm as a whole if the Partner had actual or apparent authority (See Flowchart page 283)

    • This can include a Partner who joined post-debt if they entered into novation

  3. A Partner who left the firm before the debt was incurred if:

    1. As a result of ‘Holding Out’ (s.14(1))

  • The test set out in Nationwide v Lewis: where a creditor relied on a representation that a particular person was a Partner by oral (in conversation)/written (headed notepaper)/conduct (previous dealings) behaviour.

    1. Failure to give Notice of Departure (s.36)

  • If the 3rd P has not received appropriate notice of a Partner’s retirement and then subsequently gives credit to the firm believing them to be a Partner, he may hold that Partner liable for the debts unless:

    • Actual notice was given (letter to all parties with whom the firm has contracted previously) – s.36(1)

    • Notice was placed in the London Gazette (irrespective of whether the 3rd P knew the publication existed or did not read it) – s.36(2)

      • ...
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