Gibson, Business Law, 11th Edition

Chapter 12: Sole Traders and Partnerships

LO 12.1 Define a sole trader and explain its advantages and disadvantages

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. Which of the following statements about sole traders is not true?
2. As a sole trader, the owner retains all the profits made by the business.
3. As a sole trader, the business is a separate legal entity.
4. As a sole trader, less legal formalities are needed to establish the business.
5. As a sole trader, your business must be registered under the Corporations Act 2001 (Cth).

Difficulty: Basic

Topic: Who is a sole trader

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.1 Define a sole trader and explain its advantages and disadvantages

True/False: Identify whether the statement is True or False.

1. Partnerships and sole traders are both regulated by state Partnership Acts.
2. True
3. False

Difficulty: Basic

Topic: Who is a sole trader

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.1 Define a sole trader and explain its advantages and disadvantages

LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. Which of the following statements regarding partnerships is true?
2. A partnership will exist if the persons involved declare that they are in partnership.
3. Sharing of profits and losses is an essential element of a partnership.
4. All partners are equal.
5. A partnership agreement must be in writing.

Difficulty: Basic

Topic: When does a partnership exist

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

1. Which of the following is not an essential element for the creation of a partnership?
2. The partners must be carrying on a business in common.
3. The business must be carried on by or on behalf of all the partners.
4. The partnership must be registered with the Australian Securities and Investments Commission (ASIC).
5. The partners must intend to make a profit.

Difficulty: Basic

Topic: When does a partnership exist

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

True/False: Identify whether the statement is True or False.

1. Partnerships and sole traders are both regulated by state jurisdiction.
2. True
3. False

Difficulty: Moderate

Topic: What areas of law apply to partnerships

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

1. Only organisations created for the purpose of making a profit are considered partnerships.
2. True
3. False

Difficulty: Basic

Topic: What are the essential elements of a partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

1. In Smith v Anderson (1880) 15 Ch D 247, the trust was deemed to be a partnership because of a single commercial venture between the trust holders.
2. True
3. False

Difficulty: Complex

Topic: Carrying on a business

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

1. The existence of a partnership is to be determined from what the parties do rather than what the parties call themselves.
2. True
3. False

Difficulty: Basic

Topic: When does a partnership exist

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

Essay: Write your answer in the space provided or on a separate sheet of paper.

1. Identify the three circumstances required as proof of a partnership.

Difficulty: Basic

Topic: When does a partnership exist

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.2 Define a partnership and list the essential elements and circumstances that must be present for a partnership to exist.

• Carrying on a business. A ‘business’ is defined as any trade, occupation or profession. The words ‘carrying on business’ suggest an active occupation of profession continuously carried on.
• Carrying on a business in common. The business must be operated by, or on behalf of, all the partners. There must be an agency relationship and mutual rights or obligations.
• With a view to profit. Partnerships must be associations formed for making a profit.

Therefore, in order to determine whether a partnership exists, all the circumstances must be examined in order to ascertain:

• What the intention of the parties was;
• Whether or not there was a sharing of profits and losses accompanied by a state of agency;
• Whether each has a voice in the management of the business, so that it could be established whether agency has been created between the parties.

LO 12.3 Distinguish between partnerships and other business relationships

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. A form of property ownership in which the parties have equal shares which were created at the same time and which pass automatically to the survivor on the death of one of the parties is known as:
2. tenancy in common.
3. unity of ownership.
4. joint tenancy.
5. common ownership.

Difficulty: Moderate

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. A form of property ownership in which the parties have shares which can be unequal and dealt with separately is known as:
2. common ownership.
3. unity of ownership.
4. tenancy in common.
5. joint tenancy.

Difficulty: Moderate

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. If two parties enter into a share farm agreement in which one provides the land and the other provides the labour, this is most likely to be a(n):
2. partnership.
3. employment relationship.
4. joint venture.
5. tenancy in common.

Difficulty: Moderate

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. The case of: Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 14 is authority for the principle that:
2. ‘carrying on’ of a business requires repetition of acts.
3. the existence of a partnership is determined from what the parties do rather than what they call themselves.
4. partnership agreements should be in writing.
5. the existence of a fiduciary relationship is essential for the creation of a partnership.

Difficulty: Basic

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. When parties conduct an isolated commercial transaction, it is considered a joint venture rather than a partnership.
2. True
3. False

Difficulty: Basic

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. An important difference between a partnership and a joint venture is the fiduciary nature of a partnership relationship.
2. True
3. False

Difficulty: Basic

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. A written partnership agreement must conform to the requirements of the Partnership Act of the relevant state or territory.
2. True
3. False

Difficulty: Basic

Topic: How a partnership is created

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. Define a joint venture and discuss how it differs from a partnership.

Difficulty: Basic

Topic: What other type of relationships can look like partnerships

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

Mining, property development, manufacturing, publishing, entertainment and share farming are often joint venture projects.

A joint venture can be distinguished from a partnership on the basis that:

• It is usually an ad hoc undertaking for a specific time or task;

• It is a separate venture for each of the parties;

• Assets in the joint venture are usually held as individual shares by the parties as tenants in common;

• Liability is individual rather than several;

• Profits are received separately and invoices are usually issued separately and paid individually; and

• The parties can dispose of their interest in the joint venture without the need to assign as may be the case under the Partnership Act.

1. How would you explain to a person intending to form a partnership that although a written partnership agreement is not legally necessary, it is desirable?

Difficulty: Complex

Topic: How a partnership is created

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

1. In the case of Duke Group Ltd (In Liq) v Pilmer & Ors [1999] SASC 97, could National Wheeler ‘presenting’ themselves as a partnership be considered misleading to potential clients? Discuss.

Difficulty: Complex

Topic: Joint ventures

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 12.3 Distinguish between partnerships and other business relationships.

LO 12.4 Explain the relationship of partners to outsiders

1. Which of the following does not fall within the implied authority of a partner to bind the firm?
2. Purchasing goods usually used by the firm.
3. Receiving payments and giving receipts.
4. Inviting others to join the partnership.
5. Employing suitable staff.

Difficulty: Basic

Topic: What is the relationship of partners to outsiders

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.4 Explain the relationship of partners to outsiders.

1. Which of the following is not an element of apparent authority?
2. The third party was not aware that the person lacked authority.
3. The transaction was business of the kind carried on by the firm.
4. The transaction was not carried out in the usual way.
5. The third party knew or reasonably believed the person to be a partner.

Difficulty: Basic

Topic: What is the relationship of partners to outsiders

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.4 Explain the relationship of partners to outsiders.

When partners are bound by the acts of all partners within the firm, we call this actual authority.

1. True
2. False

Difficulty: Basic

Topic: What is the relationship of partners to outsiders

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.4 Explain the relationship of partners to outsiders.

LO 12.5 Discuss the liability of partners in contract and tort

1. In the context of a partnership, ‘joint and several liability’ means that:
2. The partners can only be sued separately if action against the firm fails.
3. The partners can be sued collectively in the name of the firm or individually in their own name.
4. Any legal action must name the firm and each partner individually.
5. All of the above

Difficulty: Complex

Topic: What is the liability of partners in contract and tort

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

1. Why was the partnership found to be liable in the case of Polkinghorne v Holland [1934] HCA 28?
2. The negligent advice was considered to be within the normal course of business.
3. The negligent advice was given outside the partnership’s business.
4. The negligent advice was not given within the normal course of the business of the partnership.
5. The negligent advice was given by a partner in the partnership without a disclaimer.

Difficulty: Moderate

Topic: What is the liability of partners in contract and tort

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

1. ‘Holding out’ occurs when a person who by conduct or his word represents himself as a partner in a firm.
2. True
3. False

Difficulty: Moderate

Topic: Being an apparent partner or ‘holding out’

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

1. According to the Partnership Acts, the liability of partners in contract is severable.
2. True
3. False

Difficulty: Complex

Topic: Being an apparent partner or ‘holding out’

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

1. In the event that notice of a retiring partner is given to all business associates of the partnership, the retiring partner will be liable for:
2. Only the debts of the partnership incurred after they retired
3. Only the debts of the partnership incurred before they retired
4. None of the debts of the partnership
5. All of the debts of the partnership

Difficulty: Basic

Topic: Does a retiring partner continue to be liable for partnership debts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

1. Is it necessary for a partnership to advise customers when a partner retires?

Difficulty: Basic

Topic: Does a retiring partner continue to be liable for partnership debts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

• Specific notice of retirement should be given to all those persons who have had dealings with the firm;

• Notices should be placed in the public notices section of the daily newspapers and in the Government Gazette to warn both existing and potential customers of the firm about the partner’s retirement; and

• Notice must be forwarded to the Corporate Affairs Commission or Registrar of Business Names whichever the case may be, where the firm name has been registered.

If these steps are not taken, both former and new customers of the firm are entitled to hold the retired member responsible by conduct for the debts of the firm.

1. Do you agree that all partners should be held liable for the unlawful conscious acts of one partner? Discuss.

Difficulty: Complex

Topic: What is the liability of partners in contract and tort

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 12.5 Discuss the liability of partners in contract and tort.

LO 12.6 Explain the rights and duties of each partner

1. In the absence of an agreement to the contrary, a person joining a partnership is liable for:
2. None of the debts of the partnership
3. Only the debts of the partnership incurred after they joined
4. Only the debts of the partnership incurred before they joined
5. All of the debts of the partnership

Difficulty: Basic

Topic: What is the relationship between partners

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Which of the following statements about partner’s rights is not true?
2. A partner is entitled to interest on any money loaned to the business.
3. Each partner is entitled to claim reasonable remuneration for working for the partnership.
4. Any partner may take part in the management of the business.
5. No partner is entitled to interest on their investment in the partnership until net profit has been determined.

Difficulty: Moderate

Topic: What are the rights of each partner?

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Which of the following statements about partner’s rights is true?
2. A partner who incurs liabilities at any time is entitled to indemnity from the other partners.
3. Any partner may access the partnership books in order to inspect and copy them.
4. Partners share in any profits and losses of the business in proportion to their investment in the business.
5. The consent of a majority of the partners is needed to introduce a new partner to the partnership.

Difficulty: Moderate

Topic: What are the rights of each partner?

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. In what circumstances can a majority of partners expel a partner?
2. Only if the power to expel is contained in the partnership agreement and exercised in good faith.
3. Partners cannot be expelled by a majority under any circumstances.
4. Only if the partnership agreement contains the power to expel rule.
5. Expulsion is allowed in equity for breach of fiduciary duties.

Difficulty: Moderate

Topic: What are the rights of each partner?

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Which of the following statements is not true:
2. Partnership books must be kept at the principal place of business of the partnership.
3. There is a rebuttable presumption that partner’s interests in capital, profits and losses will be equal.
4. Partners are entitled to be paid interest on loans to the partnership at a rate agreed between the parties.
5. Where the agreement allows a partner to introduce a new partner, the terms of the agreement must be followed exactly.

Difficulty: Complex

Topic: What are the rights of each partner?

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Expulsion of a partner has the same effect as dissolution of a partnership.
2. True
3. False

Difficulty: Basic

Topic: What are the rights of each partner?

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Partners have the following duties:
2. To refrain from competition
3. To account for private profits
4. To render true accounts
5. All of the above

Difficulty: Complex

Topic: What are the duties of each partner

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Why did the court find a breach of duty in the case of Law v Law [1905] 1 Ch 140?
2. A partner had disclosed some, but not all, of the partnership’s assets.
3. A partner disclosed the full extent of the partnership assets.
4. A partner had become a director of a client company.
5. A partner had entered into business with a client of the firm without the firm’s knowledge.

Difficulty: Basic

Topic: What are the duties of each partner?

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. Property of a partner used for the purpose of the partnership business automatically becomes partnership property.
2. True
3. False

Difficulty: Basic

Topic: What happens to partnership property

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

1. If you were forming a partnership with your best friend, which of the suggested rules in the Act regarding the rights and duties of partners would you modify? Explain your answers.

Difficulty: Complex

Topic: What are the rights of each partner?

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 12.6 Explain the rights and duties of each partner.

LO 12.7 List and discuss the circumstances in which a partnership may be dissolved

1. Which of the following is one of the grounds for which a court will dissolve a partnership?
2. If one of the partners dies
3. If the purpose of the partnership is or becomes illegal
4. If there has been persistent breach of the partnership agreement
5. If one of the partners is declared bankrupt

Difficulty: Moderate

Topic: What is the effect of dissolution

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.7 List and discuss the circumstances in which a partnership may be dissolved.

1. Under which circumstance may a partnership be dissolved?
2. Illegality
3. The parties
4. Operation of law
5. All of the above

Difficulty: Basic

Topic: What is the effect of dissolution

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.7 List and discuss the circumstances in which a partnership may be dissolved.

1. A partnership is automatically dissolved if the purpose of the partnership becomes illegal.
2. True
3. False

Difficulty: Basic

Topic: What is the effect of dissolution

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.7 List and discuss the circumstances in which a partnership may be dissolved.

1. A partnership is automatically dissolved if one of the partners dies.
2. True
3. False

Difficulty: Basic

Topic: What is the effect of dissolution

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.7 List and discuss the circumstances in which a partnership may be dissolved.

1. What do you understand by the term ‘dissolution’?

Difficulty: Basic

Topic: What is the effect of dissolution

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.7 List and discuss the circumstances in which a partnership may be dissolved.

LO 12.8 Explain the concept and formalities of a limited partnership

1. A ‘limited’ partner has what type of liability?
2. Limited partners are liable for the debts of the partnership beyond their capital contribution.
3. Limited partners have unlimited liability for the debts of the partnership.
4. Limited partners are not liable for the debts of the partnership beyond their agreed capital contribution.
5. Limited partners have no liability for the debts of the partnership.

Difficulty: Basic

Topic: What is a limited partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.8 Explain the concept and formalities of a limited partnership.

1. Which of the following statements is not correct?
2. A limited partnership must be registered.
3. A limited partner has only a limited role in management of the partnership business.
4. A general partner has unlimited liability for partnership debts.
5. A limited partnership must have at least one general partner.

Difficulty: Basic

Topic: What is a limited partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.8 Explain the concept and formalities of a limited partnership.

1. A limited liability partnership can have a maximum of 20 limited partners.
2. True
3. False

Difficulty: Basic

Topic: What is a limited partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.8 Explain the concept and formalities of a limited partnership.

1. A limited liability partnership can have a maximum of 20 general partners.
2. True
3. False

Difficulty: Basic

Topic: What is a limited partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.8 Explain the concept and formalities of a limited partnership.

1. Discuss the differences between a limited partner and a general partner.

Difficulty: Basic

Topic: What is a limited partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 12.8 Explain the concept and formalities of a limited partnership.

The limited partner does not have any management input and has no authority to bind the firm.

A general partner has an unlimited liability and is liable for all debts and obligations of the firm. The role of the general partner is to manage the limited partner.