Partnership and LLP formation - Partnership and LLP agreements

Overview

Understanding the intricacies of Partnership and Limited Liability Partnership (LLP) formation is essential for success in the SQE1 FLK1 exam. This comprehensive guide delves into the legal frameworks, formation processes, and vital role of agreements in these business structures. By thoroughly comprehending these concepts, candidates will be well-prepared to tackle complex legal scenarios and excel in their examinations and future legal practice.

Partnership Formation and Legal Framework

Partnerships are primarily governed by the Partnership Act 1890, which defines a partnership as "the relation which subsists between persons carrying on a business in common with a view of profit" (Section 1(1)). This definition encompasses three key elements:

1. A business being carried on
2. In common between two or more persons
3. With a view to profit

Implied Partnerships and Conduct

Notably, partnerships can arise by implication, even without a formal agreement. In Weiner v Harris [1910] 1 KB 285, the court held that a partnership can be inferred from the parties' conduct. This highlights the need for caution in business relationships to avoid inadvertently entering into partnership arrangements with associated liabilities.

Partnership Agreements

While not legally required, partnership agreements are vital for tailoring the terms of the relationship and overriding many default provisions in the Partnership Act 1890. Key elements typically addressed include:

1. Profit and loss sharing ratios
2. Capital contributions
3. Management responsibilities
4. Decision-making processes
5. Dispute resolution mechanisms
6. Admission and expulsion of partners
7. Dissolution procedures

Default Provisions Under the Partnership Act 1890

In the absence of a partnership agreement, the following default provisions apply:

• Equal sharing of profits and losses (s.24(1))
• Every partner may participate in management (s.24(5))
• New partners require unanimous consent (s.24(7))
• Ordinary matters decided by majority, fundamental changes require unanimity (s.24(8))

Case Study: The Significance of Partnership Agreements

In Herring v Benson (1983) 3 BLR 71, two partners contributed unequal capital to a business. Without a partnership agreement, the court applied the default provision of equal profit sharing, despite the disparity in contributions. This case highlights the importance of well-drafted partnership agreements to ensure fair outcomes.

Limited Liability Partnership (LLP) Formation

LLPs, introduced by the Limited Liability Partnerships Act 2000, offer a hybrid structure combining elements of partnerships and limited companies. Key features include:

1. Separate legal personality
2. Limited liability for members
3. Flexibility in internal management

Formation Process

LLP formation is more formal than general partnerships and involves:

1. Registration with Companies House
2. Submission of incorporation documents, including Form LL IN01
3. LLP agreement (optional but highly recommended)
4. Payment of registration fee

LLP Agreements

While not mandatory, LLP agreements are essential for defining internal relationships between members, typically covering:

1. Members' rights and duties
2. Profit sharing arrangements
3. Decision-making processes
4. Dispute resolution mechanisms
5. Exit provisions

In the absence of an LLP agreement, default provisions from the Limited Liability Partnerships Act 2000 and the Limited Liability Partnerships Regulations 2001 apply.

Comparative Analysis: Partnerships vs. LLPs

Recognizing key differences between partnerships and LLPs is vital for advising clients and answering exam questions effectively.

Case Study: Choosing Between Partnership and LLP

Consider a group of four solicitors establishing a new law firm. Key considerations include:

1. Liability: LLP structure offers protection from personal liability for firm debts.
2. Regulatory Requirements: Specific SRA rules apply to LLPs.
3. Taxation: Both structures offer tax transparency, but LLPs may provide more flexibility.
4. Public Perception: LLP structure may be perceived as more established and credible.

In this scenario, the solicitors might opt for an LLP structure with a comprehensive agreement to govern internal relationships and decision-making processes.

Legal Implications and Responsibilities

Partnerships

1. Joint and Several Liability: Partners are jointly and severally liable for all firm debts and obligations (s.9, Partnership Act 1890). In Donoghue v Stevenson [1932] AC 562, Lord Macmillan affirmed that a partner is "liable to the utmost farthing of his fortune for the debts contracted by his firm."

2. Agency: Each partner acts as an agent of the firm and other partners for business purposes (s.5, Partnership Act 1890). In Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103, the court held that a partner's actions can bind the firm, even if exceeding actual authority, provided they act within apparent authority.

LLPs

1. Limited Liability: Members enjoy limited liability, protecting personal assets from business debts. However, this protection is not absolute, with exceptions for fraud or personal negligence.

2. Duties of Members: Case law has established that LLP members owe fiduciary duties similar to company directors. In F&C Alternative Investments (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), the court affirmed these duties.

3. Clawback Provisions: Under s.214A of the Insolvency Act 1986, members of an insolvent LLP may be required to contribute to its assets if they knew or ought to have concluded that insolvent liquidation was unavoidable.

Conclusion

A thorough understanding of partnership and LLP formation and legal implications is essential for success in the SQE1 FLK1 exam. Key points to remember include:

1. The value of well-drafted partnership and LLP agreements in overriding default statutory provisions.
2. The distinction between partnerships and LLPs in terms of legal personality and liability.
3. The formal registration process required for LLPs compared to the potential for implied partnerships.
4. The legal responsibilities and potential liabilities of partners and LLP members.
5. The relevance of key case law in shaping the interpretation and application of partnership and LLP principles.

By mastering these concepts, candidates will be well-equipped to analyze complex scenarios, provide sound legal advice, and excel in both exam and real-world contexts.