ICAEW BL · Chapter 7
Partnerships and limited liability partnerships MCQs with Answers
10 multiple-choice questions on Partnerships and limited liability partnerships for ICAEW BL Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following arrangements is most likely to be a partnership under the Partnership Act 1890?
- A) Kofi and Lena run a catering business together, making decisions jointly and sharing the net profits
- B) Two sisters jointly own a flat that they let to tenants, splitting the rent between them
- C) A lender advances money to a sole trader at an interest rate that varies with the trader's profits
- D) A sales assistant is paid a share of the shop's profits as part of her wages
Show answer & explanation
Answer: A) Kofi and Lena run a catering business together, making decisions jointly and sharing the net profits
Section 1 defines partnership as the relation which subsists between persons carrying on a business in common with a view of profit. Kofi and Lena carry on a business together and share its net profits, which is strong evidence of partnership (s2(3)). Co-ownership of property does not of itself create a partnership, even where the income from it is shared (s2(1)). A loan at a rate varying with profits, and an employee's pay by a share of profits, do not of themselves make the lender or employee a partner (s2(3)(b) and (d)).
Question 2
The partnership agreement of Tern & Co, an accountancy practice, says that no partner may buy equipment costing over £10,000 without the consent of all partners. Partner Delphine buys a £14,000 photocopier from a supplier who knows nothing of this restriction. Is the firm bound?
- A) No, because Delphine breached the partnership agreement
- B) Yes, because buying office equipment is in the usual course of the firm's business and the supplier did not know of the restriction
- C) No, because a partner can bind the firm only if all partners sign the contract
- D) Yes, but only if the other partners ratify the purchase
Show answer & explanation
Answer: B) Yes, because buying office equipment is in the usual course of the firm's business and the supplier did not know of the restriction
Under s5 Partnership Act 1890, every partner is an agent of the firm and binds it when carrying on, in the usual way, business of the kind carried on by the firm. The exceptions are where the partner had no authority and the third party knew this, or did not believe they were dealing with a partner. The supplier knew nothing of the internal limit, so the firm is bound. Delphine may have to indemnify her co-partners.
Question 3
Ellis joins an existing partnership on 1 April. A supplier's invoice for goods delivered to the firm in February remains unpaid. Is Ellis personally liable for that debt?
- A) No, because a person admitted as a partner does not become liable for debts incurred before becoming a partner
- B) Yes, because all partners are jointly liable for every debt of the firm
- C) Yes, because the invoice was still unpaid when Ellis joined
- D) Yes, but only for a share proportionate to his capital contribution
Show answer & explanation
Answer: A) No, because a person admitted as a partner does not become liable for debts incurred before becoming a partner
Under s17(1) Partnership Act 1890, a person admitted as a partner into an existing firm does not become liable to creditors for anything done before they became a partner. Liability for earlier debts arises only if there is a novation agreed with the creditor. Partners are liable for debts incurred while they are partners, not before.
Question 4
Gwen retires from the firm of Hale & Partners. The firm places a notice of her retirement in the London Gazette but writes to no one. Six months later the firm incurs debts to (1) Orchard Ltd, a long-standing supplier that had dealt with the firm while Gwen was a partner and has not otherwise learned of her retirement, and (2) Pemberton Ltd, a new supplier that had never heard of Gwen. Who can hold Gwen liable for these debts?
- A) Pemberton Ltd only, because it is a new creditor
- B) Orchard Ltd only, because existing customers are entitled to actual notice of retirement
- C) Both Orchard Ltd and Pemberton Ltd, because Gwen was not personally removed from the partnership register
- D) Neither creditor, because the Gazette notice is effective against everyone
Show answer & explanation
Answer: B) Orchard Ltd only, because existing customers are entitled to actual notice of retirement
Under s36(1) Partnership Act 1890, a person who dealt with the firm before a change in its constitution may treat all apparent members as still partners until they have notice of the change. A Gazette notice is not enough for such existing customers: they need actual notice, which Orchard never received, so Gwen is liable to Orchard. Under s36(2), a Gazette notice is notice to persons who had no dealings with the firm before the change. In any event, s36(3) provides that a retired partner is not liable for debts contracted after retirement to persons who did not know them to be a partner, so Pemberton could never hold Gwen liable. There is no partnership register.
Question 5
Which of the following correctly describes an ordinary partnership formed under the Partnership Act 1890 in England and Wales?
- A) It is a separate legal person and partners' liability is limited to their capital
- B) It must have at least one partner whose liability is limited
- C) It has no legal personality separate from its partners, and the partners have unlimited liability for its debts
- D) It must file annual accounts at Companies House
Show answer & explanation
Answer: C) It has no legal personality separate from its partners, and the partners have unlimited liability for its debts
An English partnership (a 'firm') has no legal personality separate from its members. Partners are jointly liable for the firm's debts without limit. Limited liability is available only through a limited partnership or an LLP. Ordinary partnerships do not file accounts at Companies House.
Question 6
Asha, Bram and Celia form a partnership with no written or implied agreement on profit sharing. They contributed capital of £60,000, £30,000 and £10,000 respectively. This year's profit is £45,000. Under the Partnership Act 1890, how much profit is Asha entitled to?
- A) £27,000
- B) £22,500
- C) £30,000
- D) £15,000
Show answer & explanation
Answer: D) £15,000
In the absence of contrary agreement, s24(1) provides that partners share equally in capital and profits, however much capital each contributed. Asha's share is therefore £45,000 ÷ 3 = £15,000. £27,000 wrongly allocates profit by capital (60/100 × £45,000). The other figures have no basis in the default rules.
Question 7
In the absence of any contrary agreement, which of the following decisions requires the consent of ALL partners under the Partnership Act 1890?
- A) Ordering stock for the firm's ordinary business
- B) Admitting a new partner
- C) Hiring a junior member of staff
- D) Choosing which bank branch the firm uses
Show answer & explanation
Answer: B) Admitting a new partner
Section 24 provides that ordinary matters connected with the partnership business may be decided by a majority of partners. However, no person may be introduced as a partner without the consent of all existing partners (s24(7)), and the nature of the business cannot be changed without unanimous consent (s24(8)). Stock orders, hiring staff and banking arrangements are ordinary matters.
Question 8
Hartwell LLP, a consultancy formed under the Limited Liability Partnerships Act 2000, signs a five-year lease of office equipment through one of its members, Jade, who acts with authority. Hartwell LLP later cannot pay the rentals. Who is liable to the lessor under the lease?
- A) Hartwell LLP itself, as a body corporate with legal personality separate from its members; the members are not personally liable on the lease merely because they are members
- B) All the members jointly, without limit, as in an ordinary partnership
- C) Only the designated members, jointly and severally
- D) Jade personally, because an LLP cannot enter into contracts in its own name
Show answer & explanation
Answer: A) Hartwell LLP itself, as a body corporate with legal personality separate from its members; the members are not personally liable on the lease merely because they are members
An LLP is a body corporate with legal personality separate from its members (s1 LLPA 2000). It contracts in its own name, owns its property and is liable for its own debts. Members act as its agents, so Jade binds the LLP, not herself. Members' liability is generally limited to what they agreed to contribute, although in an insolvent winding up they may be ordered to contribute for wrongful or fraudulent trading or to repay certain withdrawals. Designated members have extra administrative duties, such as filing, but no extra liability for the LLP's debts.
Question 9
Rowan is a limited partner in a limited partnership registered under the Limited Partnerships Act 1907. Frustrated with the business's performance, he begins negotiating supplier contracts and directing staff. What is the legal consequence?
- A) The limited partnership is automatically converted into an LLP
- B) He loses his capital contribution but his liability remains limited
- C) Nothing, because a limited partner has the same management rights as a general partner
- D) He becomes liable as a general partner for debts incurred while he takes part in management
Show answer & explanation
Answer: D) He becomes liable as a general partner for debts incurred while he takes part in management
A limited partner must not take part in managing the business. Under s6 Limited Partnerships Act 1907, a limited partner who does so is liable for all debts and obligations of the firm incurred while they take part in management, as if they were a general partner. The partnership does not convert into an LLP, and a limited partner does not share the general partner's management rights.
Question 10
Bertrand, a retired accountant, lets his former firm keep his name on its letterhead as 'consultant partner', although he takes no part in the business. A bank lends money to the firm after seeing the letterhead and believing he is a partner. The firm cannot repay. Is Bertrand liable to the bank?
- A) No, because he was not in fact a partner and received no share of profits
- B) No, because the bank should have checked the partnership agreement
- C) Yes, because he knowingly allowed himself to be represented as a partner and the bank gave credit on that basis
- D) Yes, but only if he had been a partner when the loan was negotiated
Show answer & explanation
Answer: C) Yes, because he knowingly allowed himself to be represented as a partner and the bank gave credit on that basis
Under s14 Partnership Act 1890, a person who represents themselves, or knowingly allows themselves to be represented, as a partner is liable as a partner to anyone who gives credit to the firm on the faith of that representation. This is liability by holding out (estoppel). It applies even though Bertrand is not actually a partner and takes no profits.