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Legal Aspects of Business

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Executive summary
There are various different types of business organization that an aspiring entrepreneur can
choose from while contemplating a start-up. Each of these structures has its own pros and cons
and its unique legal requirements. A proper understanding of these legal facets is therefore
crucial before a final decision is made regarding the structure of a proposed business entity. This
report studies these aspects in detail.
Firstly, the report makes a critical examination of the pros and cons of setting up an unlimited
partnership. It shows that despite the partners being personally liable for the actions of the firm
and its other partners; nevertheless this business form has many unique advantages. Secondly,
the report explores the duties and legal obligations of the partners in an unlimited partnership as
per the PA, 1890. The relevant sections explored for this purpose were S.28 to S.30 of the PA,
1890. Thirdly, the report investigated the various ways in which an unlimited partnership can be
terminated according to the provisions of the partnership act. It also studied the liabilities and
duties arising for the partners during such termination. Finally, the report critically described the
main factors that can lead to a unlimited partnership firm to succeed. These factors were
explained in the context of a chartered accountancy firm established in the UK.

Contents
Executive summary.........................................................................................................................1
Introduction......................................................................................................................................2
Part (a).............................................................................................................................................2
1.1 Setting up/Starting an unlimited partnership.........................................................................2
1.2 Running an unlimited partnership.........................................................................................4
1.3 Duties and liabilities in the termination of an unlimited partnership....................................5
Part (b).............................................................................................................................................7
Conclusion.......................................................................................................................................9

Introduction
Partnership is a very popular form of business in UK where two or more people want to establish
a business jointly voluntarily for the purpose of earning profit. The Partnership Act, 1890
regulates and governs the partnership business related issues like formation, responsibilities of
the partners, dissolution etc. The partnership business can take two forms which are limited and
unlimited partnership which have some basic differences in its structure and nature of the
partners. Various aspects of partnership are analysed in this report.

Part (a)
1.1 Setting up/Starting an unlimited partnership
A partnership generally means an unlimited one where all of the partners are equally liable for
the business activities and they will have unlimited liability which means that their personal
properties can be used to pay off the liabilities of the partnership over their equity in the
business. So the unlimited partnership is just like the sole proprietorship in terms of the liability
where the only difference is the accumulated funds and expertise collected from more than one
person (Gage, 2014). The partnership contract may or may not be used to state the duties and
responsibilities of the partners in the unlimited partnership business.
Partnership business is formed by an agreement between the people willing to form a business
together and the agreement is the root of the partnership business. So the business does not need
any formal procedure to be established as seen in case of the corporations or co-operative firms.
The business will be set up when the partners orally or in a written form make an agreement to
run a business accepting the unlimited liability (Hall et al., 2014). The partnership can be formed
even from the conduct of the partners to make a business relationship without being aware of the
fact that they have formed a partnership. The Partnership Act 1890 has stated the severity of
the partners liability in sections 9 and 12 which say that the partners after setting up their
partnership will be liable for their own and other persons action in the business. The partnership
contract makes the partners mutually responsible for each others deeds.

Partnership will be formed on the date when the partners run their business activities jointly with
the same goal of earning profit. The PA 1890 has mentioned this very first criterion for deciding
on the date of establishment of a partnership in section 1 and it says that the subsisting
relationship among the persons of the business will be called the partnership business. The
formation of unlimited partnership is just the same when partnership is talked about. The limited
partnership formation requires that the partners with limited liability and unlimited liability are
mentioned in the partnership agreement with their investment, duties, responsibilities and rights
and obligations (Pollock, 2008). Unlimited partnership is different from the corporations or other
businesses as the partnership does not have any distinct existence from the partners as the
corporations have. Only the contractual relationship among the partners means the partnership
which have no legal entity and the partners are not separate from the business. The partnership
can be formed with a company as a partner but the company will never be a partnership. Section
2 of PA 1890 says that the partnership provides common and joint ownership of the partnership
property and liability after it has started.
The formation of an unlimited partnership will provide both some favourable and unfavourable
things for the partners. The first advantage of a partnership is the accumulation of funds from the
partners which can be used for doing business efficiently (Whitehead, 2012). The partners in the
unlimited partnership are not limited and so the investments will be greater having many
partners. Secondly, a number of partners have different skills, knowledge and abilities which can
be useful for managing the business properly. Thirdly, the partners can share the risks and losses
of the business equally or at the contractual rate of partnership without making the individual
partners solely liable for them. Fourthly, the partners of an unlimited partnership can be the
resources when they have unique resources like professional expertise, networking or scarce
resources etc. (Marcouse, 2013). Last of all, the formation of unlimited partnership is easier
than other business forms where a number of people join together like company or co-operatives
and it also avoids double taxation of the partners (Davies, 2012).
But unlimited partnership also has some disadvantages such as the partners have unlimited
liability that makes their personal belongings unsecured too. They may face unfair liability
arising out of the inconsiderate activities of other partners and the more the number of partners,
the more difficult it becomes to manage the different opinions and views of partners for the

management of the business as section 24(5) of PA 1890 requires the involvement of all partners
in management (Tayeb, 2009). The partnership faces the risk of dissolution for this too. It also
means lower share of profit as section 24(1) mandates equal distribution of profit.
So when people want to start an unlimited partnership the advantages and disadvantages should
be analysed critically before starting the business.

1.2 Running an unlimited partnership


The unlimited partnership is run through the partners who are given with various duties,
responsibilities and obligations according to the partnership agreement. According to PA 1890
these duties and responsibilities must be performed by the partners and these can be clearly
mentioned in the partnership contract as well to avoid future uncertainties. Otherwise the PA
1890 and implied regulations are used to judge the activities of the partners who can be legally
guilty of not performing their part (Cahn and Donald, 2010).
The partners run the business jointly and they act like the agents of the partnership. So all the
partners are bound to participate in the management of the business in case of unlimited
partnership for taking the share of profit which would not be required in case of limited
partnership according to section 2(2) of the act. Partners will be liable for the unlawful business
of the partnership even if they have not committed any crime but the guilty partners have the
authority to make the illegal activities according to the agency law. Generally the partnership
agreement means the implication of PA 1890 and section 24 of the act states the required actions
of the partners to run the business (Dobson et al., 2008). But it has also expressed that the
implied or expressed partnership contract can change the expected actions of the partners to run
the business. Section 24(7) states that the introduction of a new partner in partnership firm is
possible only with the consent of all the partners. Otherwise the partnership cannot be formed
adding partners to make the business relationship. One important point of running an unlimited
partnership is that Saywell v Pope [1979] says the employees who are employed to run a
business even with the contract of sharing profit will not be the partners as they do not share any
common goal from the business.
Again Section 19 of PA 1890 says that the partners can later change the duties and obligations of
the partners temporarily or permanently later with unanimous agreement impliedly, orally or in a

written agreement. Section 21(1) states that all the partners have Prima Facie meaning that
they have the legal rights to take a shared profit from the partnership that comes from this
business (Jones, 2011). All the business activities and details of transactions should be
maintained by the partners properly so that the partners can have access to the books to do their
inquiry and inspection as per section 24(9) of PA 1890.
The partners are responsible for the full disclosure of the activities and information regarding the
partnership to other partners according to section 28 of PA 1890. They are the legal
representatives of each other and so they have to maintain the duty of good faith in the
partnership business. When the partners breach their duty of maintaining good faith of other
partners, the other partners have the right to take legal actions against the guilty party. The duty
of accountability comes from this section and section 29 states that the partners have to mention
any profits or benefits derived from using the partnership resources, networks, contacts or name
that have come whether or not from the knowledge of other partners. As the partners have equal
rights over the profit of the business there is no scope for making personal profit under this act
(Beatty and Samuelson, 2007). So partners are accountable for all such transactions that they
have made without the consent of the other partners. The partners are not allowed to compete
with the firm through their personal interest or business according to section 30. They will be
accountable for the profits made by the partnership to show that they have not capitalized any
profit for their business of same nature. But when any partner leaves the partnership, this clause
becomes void as he is no longer a partner of the business. Lastly all the partnership run their
businesses to earn profit and so they have legal obligations to pay the taxes according to the law
but there is no double taxation. The income of the partners is taxed once at the tax rate applied
for unlimited partnership business in the country.
So running the unlimited partnership totally depends on the duties and responsibilities of the
partners and they are performed by them.

1.3 Duties and liabilities in the termination of an unlimited


partnership
Termination of unlimited partnership is also as easy as formation of partnership. There are many
situations which force the unlimited partnership to wind up and close the business relationship

among the partners. The termination can take various forms due to the situations and
circumstances and the different types of termination of the unlimited partnership provide
different duties and liabilities of the partners. It is important to know different types of
dissolution of partnership and then the duties and responsibilities in each of the situation as
follows:
Unanimous dissolution:
The partnership can be dissolved any time when all the partners unanimously want to end the
partnership relationship and reaches to an agreement to wind up the business. This type of
dissolution falls under the PA 1890. Sometimes a conflict arises regarding the unanimous
dissolution as there is a confusion regarding the agreement of all the members and the majority
(Gage, 2014).
Termination by expiration or notice:
Unlimited partnership can also be formed for a particular time period or purpose. The
termination of such kind partnership falls under section 32 of PA 1890. The termination of the
period or the fulfilment of the purpose will also dissolve the partnership. Section 32(a) and 32
(b) tells about these two types of termination while 32(c) section requires that partnership can
also be dissolved when the partners give notice to other partners to automatically terminate the
business relations (Keenan and Riches, 2007). However, the partnership at will can also be
formed from such type of partnership when the partners want to continue the business even after
the fulfilment of such conditions (Pollock, 2008).
Termination by Death or Bankruptcy:
PA 1890 states in section 33 that the partnership relation dissolves when any of the existing
partners dies or experiences bankruptcy and they have not agreed on other terms in their
agreement regarding this. This type of termination is one type of forces termination where the
heir of the deceased partner gets the share of profit or liability from the partnership business and
in case of the bankruptcy the other partners take their share of equity and profit from the business
after paying off all the liabilities (Davies, 2012). This forces dissolution can be avoided by
providing a provision against the situation in the partnership deed (Marcouse, 2013).

Dissolution by illegality of business:


If the partnership business is illegal in the eyes of law such as any business of weapons or drugs,
the court will held the partners liable for the illegality and dissolve the partnership business
according to section 34 of the act (Jones, 2011). Partners have less to do in this situation.
Dissolution by court order:
Section 35 of PA 1890 says that the court can order any partnership to wind up based on some
crucial grounds. For example, the lunatic or incapable partners remaining in a partnership is not
equitable for other partners and in this situation the court will give order to dissolve the
partnership firm (Dobson et al., 2008).
The duties and responsibilities of the partners in each of the situations are quite similar. The
partners have to notify other partners if he wants to end the partnership relationship according to
section 26 of PA 1890. The notice is not required in written form and it becomes effective after
the expression (Strahan and Oldham, 2010). When a partnership dissolves the duty of the
partners is to pay off the liabilities of the firm using the assets of the firm according to section 44
of PA 1890. The disposition of assets should be paid first to repay the liabilities and the rest will
be distributed equally to the partners (Keenan and Riches, 2007). The payment will be for the
loans from the partners, the capital and share of profit sequentially according to the agreed ratio.
Section 38 mandates that after the dissolution the partners have to fulfil all of their commitment
and business affairs with the customers, suppliers or other stakeholders according to section 38
of PA 1890. Then the partners cannot expel any partner without the agreement of all of the
partners as per section 25. The expelled partners from any business will also get the share from
the business as the other partners do and the delay in such payment will cause a 5% extra interest
payment or reinvestment of the share in the business to the other partners as per section 42
(Pollock, 2008).

Part (b)
The business venture to be formed will be known as X&Y Auditors and is basically a Chartered
accountants firm. The major services offered by the firm will include auditing services, tax
consultancy and audit services, corporate advisory services etc. As per the companys Act, all

public limited companies are required to publish their financial statements to the public. These
statements need to provide a true and fair view and must be audited by an external auditor. X&Y
Auditors will try to fulfill this role (MacIntyre, 2008). Moreover, all firms nowadays require a
tax consultant and even financial accounting consultant. The business venture of X&Y Auditors
will try to take advantage of this opportunity. Thus, the ultimate purpose of the firm is to provide
chartered accountancy services in an ethical and compliant manner to all its clients and thereby
assist those clients in better management (Marcouse, 2013).
X&Y Auditors will be established as an unlimited liability partnership of 2 qualified and
experienced members of the ICAEW, Mr. X and Mr. Y. However, the partnership will be
structured in such a manner that there will be scope to take on further partners in the future. The
main reason behind establishing an unlimited liability partnership is that it is the norm business
structure for CA firms in the UK. The owners of the firm are very confident regarding the future
prospects of the business enterprise and are buoyant about the firms success. There are many
reasons behind the optimism of the owners. Firstly, the owners understand that the single most
critical determinant of a firms success is an efficient management and leadership team. Thus, the
owners will assemble the best management team by hiring experienced and highly professional
CAs and will take on only the very bright students for articleship. This will enable the firm to
provide the best service to clients and thereby gain their trust and future business (Pollock,
2008). Secondly, the owners will structure the partnership deed in a transparent and detailed
manner so that there is little scope for future dispute between the management. Provisions
regarding capital contributions, profit distribution, salary of the partners, interest on capital for
the partners, adding new partners, retirement of partners, dissolution of partnership etc will be set
out in detail. This will facilitate a stable working environment which in turn will foster
organizational success. Moreover, it will solidify the going concern nature of the firm and will
prevent any premature dissolution due to the factors mentioned in S.32 to S.35 of the PA, 1890
(Slorach and Ellis, 2007).
Thirdly, the organization will succeed because of its ability to attract clients and retain them
through exemplary service. A CA firm cannot directly solicit clients and thus X&Y auditors will
have to promote themselves through client word of mouth and through advertisement. Such
advertisements require money. Since the firm is an unlimited partnership, it will obtain capital

from each partners at a varying amount. The accumulated amount will be very substantial and
will enable the firm to afford spending large sums on marketing and promotion of the firm
during its initial stage. Moreover, the location of the office, its decor etc are important factors
since they matter to posh clients and big corporate names. A substantial capital in the bank will
allow the firm to spend freely on these items (MacIntyre, 2008). Fourthly, a major reason behind
the success of the firm will be its ability to pool together and leverage the skills and experience
of its partners. The partners will have complementary areas of skill and expertise. For example,
one of them is a specialist in Auditing whereas another is a specialist in tax consultancy. In
addition to the partners, specialist employees will be hired with expertise in Accounts
preparation, Book keeping, capital gains tax, inheritance tax, payroll, personal tax, self
assessment, small businesses, Public limited companies etc. This vast range of skill will allow
the firm to cater to the needs of a wider portfolio of clients and thus generate greater revenue for
the firm (Strahan and Oldham, 2010).
Finally, the firm will succeed because of the full compliance an adherence of the partners to
their various duties and responsibilities stated in S.28 to S.30 of PA, 1890. Thus, the partners will
act in good faith, will render all accounts diligently, will not compete with the firm in any other
capacity and will not attempt to obtain private profits. This will ensure that the firm operates with
a consistent and aligned goal of maximizing the shareholders wealth (Pollock, 2008).

Conclusion
There are various different types of business organization that an aspiring entrepreneur can
choose from while contemplating a start up. Each of these structures has its own pros and cons
and its unique legal requirements. A proper understanding of these legal facets is therefore
crucial before a final decision is made regarding the structure of a proposed business entity. This
report studies the various advantages and disadvantages of a unlimited liability partnership.
Moreover, it explores the various legal facets of an unlimited partnership such as duties and legal
obligations of the partners and the termination process of such. Finally, the report evaluates the
key success factors of an unlimited partnership.

Referencing
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