Question

Scenario: Sports Memorabilia Store

Farah and David decide to form a sports memorabilia retail partnership. They have known each other since business graduate school and have always worked well together on various projects. The business is doing well but cash flow is very tight. Farah takes several calls from vendors asking for payment. He believed David had been paying the bills. When he asks about this, David admits to embezzling from the partnership.

• What liability does Farah face as a result of the theft?
• Are you for or against a partnership? Please explain.

Answer 1

A partner’s authority to act for the firm is similar to that of an agent to act for a principal.

When there are more than two partners in a firm, the decisions of the majority prevail on ordinary matters relating to the firm’s business unless the decisions are contrary to the partnership agreement.

A partner’s duties are the same as those of an agent.

These duties include loyalty and good faith, obedience, reasonable care, the provision of full information on all matters affecting the firm, and the keeping of proper and correct records.

Liabilities of a Partner :

• Partners have unlimited personal liability for partnership liabilities.
• Partners are jointly liable on all firm contracts.
• They are jointly and severally liable for all torts committed by one of the partners or by a firm employee within the scope of the partnership’s business
• A partner remains liable after dissolution unless expressly released by creditors.

Hence Farah is liable to pay the creditors even though David has been stealing the monies from the Partnership firm.

I am for a Partnership but a Limited Liability Partnership.

A limited liability partnership is a new form of business organization that allows existing partnerships to convert to this new form without major renegotiation of the underlying partnership agreement.

Innocent partners in a limited liability partnership are not personally liable for the torts of other partners beyond their investment in the firm.

Some of the key features of LLPs are:

• They are a separate legal entity from their members.
• They have the benefit of limited liability for their members.
• They are taxed as a partnership.
• They have the organisational flexibility of a partnership.
• Any agreement (“LLP agreement”) between the members governing the operation of the LLP is a private document which is confidential to the members.
• They must have at least two “designated” members.
• Their “trading disclosure” requirements are similar to those of a company.
• They must be registered at Companies House.
• Their accounting and filing requirements are similar to those of a company.
• They have the ability to create floating charges