Comprehensive notes for SQE2 Business Law including topics such as:
Business and organisational characteristics: sole trader, partnership, LLP, private and unlisted public companies).
Finance:funding options: debt and equity, types of security, distribution of profits and gains, financial records...
Disclaimer: Please note that laws constantly change, therefore percentages, rate bands, tax information and legislations in force may become inaccurate
in these notes. While it is unlikely, please always cross reference to the most up to date information for your exam.
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SQE2 – Business Law
Business organisations, rules and procedures
Assessment Details
SQE2 oral None
SQE2 written Legal drafting, legal writing, legal research, case and matter analysis
Sole traders
SQE2 Assessment Details
Specification
Business and An individual carrying on business as an individual
organisational Has complete control over the business and legally owns all assets of the business
characteristics Unlimited liability
No obligation to register any information as to the business or its financial position with a public registry – not required to file annual
accounts or reports other than for the payment of income tax and VAT.
Partnerships
SQE2 Assessment Details
Specification
Legal personality and limited liability
Legal personality No legal personality separate from the partners – personal liability from partnership debts
If no partnership agreement, partner leaving means partnership is dissolved (s26 PA) – but usually new partnership is formed by
remaining partners who continue the business (but open for any partner to have the old partnership wound up – assets are sold for
distribution among partners).
Partners’ liability Contractual liability: Every partner liable jointly with other partners all debts and obligations whilst he is partner (s9)
Tortious liability: In tort partners’ liability is joint and several (s10 and 12 PA)
Liability of non-partners: x new partner, v liable after retirement in respect of debts incurred whilst he was partner (s17), v for
apparent partners for new debts incurred after former partner left (unless 3P notified of change by actual notice (had prior dealings) /
constructive notice (Gazette) (s36), v if person “holds himself out” as partner (s14).
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S17(1) PA: New partner will not automatically be liable in relation to any debts incurred by the partnership before he joined.
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S17(2) PA: A partner will still be liable after he retires in respect of debts incurred by the partnership while a partner. In order to
relieve a partner from existing liability once he retires, partnership may novate relevant agreement with the consent of the creditor
(s17(3)). But if there is no partnership agreement or agreement is silent on retirement / termination (stating that partnership will
continue as between remaining partners / details of how a partner can leave), effect of partner leaving is dissolution (s26).
- Former partner will not be liable for debts to 3P who did not know him to be partner before he left – no notice has to be given.
Procedures and documentation required to form a partnership
Procedures Partnership Act 1890 (unlimited liability for debts and obligations of the partnership).
- Not separate legal entity from partners
- Must have at least two persons to form a partnership – company can be a partner
- No need intention to form partnership – whether partnership exists is a fact
No formality, simply a relationship between persons carrying on a business in common with a view to making a profit (s1(1) PA).
- S2 contains a list of rules for determining existence of a partnership (to provide detailed guidance in determining if the criteria in
s1(1) have been met).
- S2(3) PA: Profit sharing is prima facie evidence of a partnership but not necessarily conclusive (Northern Sales v Ministry of
National Revenue: Agreement to share losses and profits makes existence more likely).
- Loan of money by one party to another does not create partnership
- If a person is not being “held out” as partner, less likely a partnership exists.
Constitutional documents Most partnerships have express agreement (minimum include provision for date of commencement, nature of partnership’s business,
capital contribution, identify partnership property, sharing profits, management duties and powers, restrictive covenants, how
Common provisions in partnership disputes are to be resolved, joining of new partners, retirement of existing partners and termination of partnership).
partnership agreements In the absence of agreement, PA 1890 contains default code which applies to relations between partner themselves – will imply terms
which apply (see below).
Fallback provisions on internal affairs (subject to any express / implied agreement between partners):
S24(1) profits: Entitled to share equally in profits (even if contributed to capital unequally). If no profit-making ratio set out, profits
and losses are shared equally.
S24(6) remuneration: Without agreement, partner not entitled to salary.
S24(8) decision making: Majority required if decisions arise during ordinary course of business. Unanimity needed for: (i) Changes
in the nature of the partnership business, (ii) introduction of a new partner, (iii) alteration to partnership agreement, (iv) expulsion
unless all partners expressly agree to confer that power.
S25: Partner cannot be expelled by majority vote unless all partners have previously expressly agreed. Need have expulsion
provisions agreed in advance, otherwise impossible to remove partner without dissolving partnership.
Corporate governance and compliance
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,Rights, duties and powers Rights
of partners Partnership property: Used to pay creditors on dissolution; surplus distributed amongst partners. Each partner deemed to own a share
in property belonging to the partnership. S20: All property brought into partnership in the course of partnership business is
partnership property (question of fact depending on intentions of partners at the time of acquisition).
Profits: All partners entitled to share equally in capital and profits (both capital and income).
Indemnity: Partners have right to indemnity by firm for payments and personal liabilities incurred (i) in ordinary and proper conduct
of the business of firm; or (ii) anything necessarily done for the preservation of the business or property of the firm.
Duties
Fiduciary relationship: Overriding duty of good faith in a partnership (s28: honest and full disclosure; s29(1): unauthorised personal
profit (profit made in breach of duty is held on trust for partnership as a whole); s30: conflict of duty and interest).
Power
Power of partner to bind the firm against the others’ wishes: S5 PA + common law.
- Bound even if other partners are not happy with the contract – such provision is intended to protect the 3P to the contract so it’s
3P’s view of what is happening that counts ((i) the act is for carrying on business of the kind carried on by the firm (ii) the act is
for carrying on such a business in the usual way).
- The 3P is not bound if (i) the 3P actually knew the partner in question was not authorised or (ii) the 3P did not know / believe the
partner was a partner.
- Partner who binds his firm without actual authority may be liable to other partners for breach of contract.
Power of non-partner to bind the firm against the partners’ wishes: Apparent / ostensible authority at common law.
- S5 does not apply at all if person entering contract is not a partner.
- Arises when the firm represents / permits a representation to be made to a 3P that a person has authority to bind the firm and 3P
relies on the representation.
- Arises also when representation is that a particular person is a partner (i.e. “holding out” that person is a partner), e.g. using old
letterhead.
Note: S5 is always the first place to look when deciding whether an act of a partner binds a firm, but does not displace application of
common law.
Dissolution of partnership
Dissolution Agreement
Automatic dissolution because of expiry of fixed term / completion of specific venture (s32(a) and (b)); death or bankruptcy of
partners (s33) (outgoing partner / estate can claim share of profits made since dissolution as Court finds attributable to use of share of
partnership assets or 5% per annum interests on share of assets + estate severally liable for debts and obligations unsatisfied, subject
to prior payment of deceased partner’s personal debts); if partnership business becomes unlawful (s34) – subject to contrary
agreement.
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, Dissolution of partnership at will (i.e. with no fixed duration) by notice from any partner (s 26 and 32(c)). Effective on date in notice
of (if notice silent) from when all partners receive notice.
Dissolution by Court as last resort (s35), includes dissolution for reasons of mental incapacity of a partner.
Effect of dissolution: Partners still have authorities, rights and obligations as needed to wind up partnership and complete unfinished
transactions (or receiver and/or manager where Court dissolves partnership). Property value ascertained. Assets / business sold as
going concern (including goodwill) to discharge debts. Surplus distributed to partners after repaying advances, amounts owed to
partners and then divided by profit share ratio. Losses met from profits, then capital, then contributions. Above can be varied by
agreement.
Winding up – collecting / Subject to agreement, once debts and liabilities paid, any money / assets left will be distributed so each partner is paid back his / her
distributing assets original capital first (s44).
Partnership agreement usually states how surplus assets are to be shared out (asset surplus ratio). If no agreed, then share with agreed
profit-sharing ratio. If still no, then shared equally (s24).
Taxation of partnerships
Taxation Each partner liable to tax as an individual on his share of the income / gains of partnership (called tax transparency).
- Even partnership not distinct legal entity, HMRC requires partnership to make single tax return of its profits which must be
agreed with HMRC (partnerships choose their own accounting period).
- Partners submit their own individual tax return containing all income received from the partnership + other income receipts.
- Note: Each partner jointly and severally liable for other partnership liabilities, but not for the tax on other partners’ shares of
partnership profits.
Normal capital gains tax principles apply on disposal of capital asset by partnership. On disposal by partnership, each partner treated
as making a disposal of his fractional share and taxed on that share of gain.
Retirement of partner:
- Income tax (closing rules apply)
- CGT: (a) Disposal of property personally owed by partners (normal CGT rules apply). (b) HMRC Statements of Practice:
o Property disposed among partners = Each partner treated as owning fractional share of each of partnership’s chargeable
assets. A disposal yielding a gain (if asset revalued) attracts CGT which is apportioned based on these fractional shares.
o If partners transfer property to each other without revaluation, pursuant to a bona fide commercial agreement, transaction is a
bargain made at arm’s length and thus not treated as a disposal for market value by HMRC.
o Normal reliefs / exemptions available.
- IHT: Where interest in partnership sold for full consideration, no transfer of value. Interest sold for less than full consideration /
no consideration = IHT charge. But no transfer of value if not intended to confer “gratuitous benefit” and made at arm’s length
between unconnected persons; or transfer is between connected persons such as might be expected to be made between
unconnected persons (partners not considered connected persons where transfers made between each other pursuant to bona fide
commercial agreement).
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