Is a new partner liable?

Would a new partner be responsible for something that happened before they joined?

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Hi all.

My client, Mr A, is a sole trader but is turning into a partnership as an existing employee, Mr B, is buying in to the business.

The business was previously a partnership but one of the partners, Mr C, left. At the point Mr C left, their capital account was signifcantly overdrawn. Mr A wasn't aware of this until the time Mr C left. They mutally agreed that overdrawing the capital account didn't breach their partnership agreement, so Mr A determined the overdrawn capital account would be a loan which would be repaid by Mr C, partially by the sale of his share of the business with the remainder payable over future years.

Mr A and Mr C also had always prepared their own accounts and tax returns. But when Mr C left, they decided to get an external accountant to check everything to ensure matters were dealt with correctly. The external accountant found some errors which were corrected and an amended tax return was submitted with tax paid.

Do these events have any consequence current or future for Mr B when he joins the business?

Replies (35)

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By Paul Crowley
30th Oct 2020 10:20

Income Tax is owed by the people that owe tax
Partnership does not owe Income tax

VAT errors, Joint and several is my understanding

DIY always goes wrong, but DIYers do not always know that it has.
Accountants tend to recommend Ltd co in preference to partnership for a good reason.

Mr B needs some proper advice. He will be exposed to joint and several
Mr B better off as a shareholder of NewCo

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Replying to Paul Crowley:
RLI
By lionofludesch
30th Oct 2020 10:18

Unless it's VAT.

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Replying to lionofludesch:
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By Paul Crowley
30th Oct 2020 10:22

Literally as I was amending. Give me some time to read and correct

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Replying to Paul Crowley:
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By TheMonarch
30th Oct 2020 10:28

Mr B is concerned that as Mr C overdrew his capital account without Mr A's knowledge and they retrospectively determined this wasn't a breach of the partnership agreement and decided it was a loan to be repaid, does he have any responsibly to report this under AMLR? He wasn't a part of the business at the time it happened.

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Replying to TheMonarch:
RLI
By lionofludesch
30th Oct 2020 10:43

TheMonarch wrote:

Mr B is concerned that as Mr C overdrew his capital account without Mr A's knowledge and they retrospectively determined this wasn't a breach of the partnership agreement and decided it was a loan to be repaid, does he have any responsibly to report this under AMLR? He wasn't a part of the business at the time it happened.

Overdrawing your capital account isn't a crime.

There's not even a debate to be had.

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Replying to TheMonarch:
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By Paul Crowley
30th Oct 2020 11:57

This getting confused
There was a partnership. entity X
B not involved
Then sole trader

Then (possibly) new partnership entity Y
B only liable for debts and actions of entity Y

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Replying to TheMonarch:
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By Paul Crowley
30th Oct 2020 12:01

TheMonarch wrote:

Mr B is concerned that as Mr C overdrew his capital account without Mr A's knowledge and they retrospectively determined this wasn't a breach of the partnership agreement and decided it was a loan to be repaid, does he have any responsibly to report this under AMLR? He wasn't a part of the business at the time it happened.

AML
Suggests a relevant regulated trade
No longer confident of ANY reply without knowing whether we discuss ACCOUNTANTS or LAW FIRM
Where was money taken from
WAS IT THE CLIENT ACCOUNT

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Replying to Paul Crowley:
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By lionofludesch
30th Oct 2020 12:14

Well, if any key facts are being withheld, any responses are worthless.

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By timothyvogel
30th Oct 2020 10:34

There is another point that is potentially more important. Yes he is joint and severally, but only for the current partnership, so not the original one involving C. However to the outside world it looks like the same continuing partnership, so they could try to come after B for the failings of C. It is unlikely they would succeed in a court of law, but the hassle involved could be significant. A new co is a good idea, or at the least change the name of the partnership.

Also on the VAT point, if the same VAT number is used (which it is implied it is) then the liability cold indeed follow though, but change the number at the same time as the name (or becoming a newco) and in my experience no client ever notices

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By timothyvogel
30th Oct 2020 10:34

There is another point that is potentially more important. Yes he is joint and severally, but only for the current partnership, so not the original one involving C. However to the outside world it looks like the same continuing partnership, so they could try to come after B for the failings of C. It is unlikely they would succeed in a court of law, but the hassle involved could be significant. A new co is a good idea, or at the least change the name of the partnership.

Also on the VAT point, if the same VAT number is used (which it is implied it is) then the liability cold indeed follow though, but change the number at the same time as the name (or becoming a newco) and in my experience no client ever notices

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By tom123
30th Oct 2020 11:25

I would be annoyed if I bought into a partnership that was less valuable or secure than when I paid over my money

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Replying to tom123:
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By TheMonarch
30th Oct 2020 11:28

I believe the new partner will be buying 50% of Mr A's business but not paying upfront. The buy in will be done on a loan basis and paid off over a long period of time. Mr A is happy with this and they believe the new partner brings other benefits to the business.

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Replying to TheMonarch:
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By frankfx
30th Oct 2020 11:50

TheMonarch wrote:

I believe the new partner will be buying 50% of Mr A's business but not paying upfront. The buy in will be done on a loan basis and paid off over a long period of time. Mr A is happy with this and they believe the new partner brings other benefits to the business.

Why not suggest to your client A, and possible client A plus B , that formal advice is sought.

A's ignorance of C's overdrawn account is a red flag, and a concern.
At least it should be.

How many red flags are yet to be tracked and traced?

Responders have hinted at just some of the issues, superficially so.

Is there a partnership agreement? or are they going to rely on Partnership Act 1890?

Do they know that they are relying on PA 1890?

Do they care?

Are they expecting you to sign post them ?

That may me a useful starting point.

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Replying to tom123:
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By lionofludesch
30th Oct 2020 11:33

tom123 wrote:

I would be annoyed if I bought into a partnership that was less valuable or secure than when I paid over my money

Me too, but it would be a civil matter unless there was an intent to deceive.

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paddle steamer
By DJKL
30th Oct 2020 11:45

I will probably show my age here but is the Gazette not still of use to announce changes to the world? I know when my father ceased in partnership he published the fact in the G to protect his position (which was just as well as after he left the firm a couple of the continuing partners were a bit naughty with money that was not their property but as all such malfeasance dated post his retiring, and the retirement was published, he was not personally liable.)

Here is link-

https://www.thegazette.co.uk/all-notices/notice

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Replying to DJKL:
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By Paul Crowley
30th Oct 2020 11:51

Good idea
I will stick that in my organic database
No client has ever mentioned that they have to me.

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By DJKL
30th Oct 2020 12:15

It tends to be larger beasts with solicitors involved who are aware of the Gazette, the fact that my father was a solicitor was probably why he was aware it was a good idea to place a notice when he retired.

The catch with partnerships is there are often no third party proofs that x left or joined, unlike companies and Companies House, so the Gazette gives that proof post event if needed. Intimating to banks etc re loans to partnerships etc is also a good idea, belt and braces.

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By lionofludesch
30th Oct 2020 12:31

DJKL wrote:

It tends to be larger beasts with solicitors involved who are aware of the Gazette, the fact that my father was a solicitor was probably why he was aware it was a good idea to place a notice when he retired.

Did there not used to be an Edinburgh Gazette, a Belfast Gazette and a London Gazette ?

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Replying to lionofludesch:
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By DJKL
30th Oct 2020 12:41

There was certainly an Edinburgh one and a London one, could not say re Belfast.

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By mumpin
30th Oct 2020 12:50

A few years' ago I explained to an ex-army client about striking off his company and the Gazette. Turned out he knew all about it as he had been mentioned in despatches for diffusing an IRA bomb.

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By Paul Crowley
30th Oct 2020 13:47

Military speak about be gazetted
Promotions, medals and the like.

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By Paul Crowley
30th Oct 2020 12:07

My 12.01
Opinions?

WHY DOES MR B HAVE AML CONCERNS

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By TheMonarch
30th Oct 2020 12:24

The business in question is a small firm of accountants, so yes, regulated by AMLR.

No funds were taken from the client account. The overdrawn funds withdrawn by Mr C were taken from funds introduced by Mr A at an earlier date.

Mr A had no concerns with Mr C's overdrawn capital account. It simply became a point of note when Mr C left the partnership as to how to proceed, which they agreed it would be deemed a loan from Mr A to Mr C.

Mr B has been fully informed of the matter so there is no intent to deceive. But as the funds were initially taken without Mr A's knowledge, who then later agreed to deem it a loan, Mr B wants to ensure that he isn't responsible to report anything as the matter arose and was handled prior to him joining the partnership.

All tax and VAT liabilities are now correct and paid.

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Replying to TheMonarch:
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By lionofludesch
30th Oct 2020 12:33

I'm still not seeing this as a crime.

What offence would you report if you decided to make an SAR ?

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Replying to lionofludesch:
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By TheMonarch
30th Oct 2020 12:45

I am in agreement with you, but wanted some confirmation from a third party.

Overdrawing capital account isn't a crime, even if it was done so without other partners knowledge. Partners have resolved the matter.

The errors within the accounts and VAT returns have been found and corrected, which has been checked by an independent third party accountant. As long as the figures are now correct and taxes are paid, I don't see a crime there either.

Personally, I don't see any risk to the new partner from a legal/financial point of view. Any risk in terms of how it happened without Mr A noticing etc... is purely an internal decision and as long as the new partner has full knowledge, there isn't any intent to deceive.

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Replying to TheMonarch:
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By Paul Crowley
30th Oct 2020 13:59

Also explains why it sounded like DIY

Not unusual that partners in a big firm do not know the bank details
But still a bit iffy when only 2 partners.
How difficult is an email to say
I am taking out £70,000 Ok with you.

Accountants getting other accountants to check their accounts suggest that it is not quite the trivial matter that the opening question suggests.
Sounds to be as if Mr A is a gentleman and Mr C lucky to have gotten away with it and seriously lucky not to be up before disciplinary if ICAEW.

Leaving a partnership after taking an unauthorised loan?
REALLY?

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Replying to Paul Crowley:
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By TheMonarch
30th Oct 2020 14:24

I agree with your comment that Mr C is lucky that Mr A has taken such view on the matter. However, as overdrawing capital isn't itself a crime, I believe it was Mr A's decision to judge whether action should be taken or whether to deem the funds to be a loan. But to confirm, absolutely no responsibility of this falls on the new partner?

Mr C may not be so lucky in the future.

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Replying to TheMonarch:
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By Bobbo
30th Oct 2020 14:00

I think the key legal/financial risk to the new partner is that their new partner, Mr A, was one of two partners of an accountancy practice which managed to get its own accounts and tax returns wrong.

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By Paul Crowley
30th Oct 2020 14:08

My concern is what happens when Mr C joins the next partnership.
Hells Bells that could be any of us

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By TheMonarch
30th Oct 2020 14:26

Agreed. As long as the new partner is fully informed of the matter, which I believe he is, then it is his a matter for him to decide on and I would expect him to be heavily involved in the preparation of any future accounts/tax returns.

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By Calculatorboy
30th Oct 2020 15:03

Gazette plus local paper and circularise all customers/ suppliers

Belt and braces

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By frankfx
30th Oct 2020 15:05

When there is a change in partners, the former Partnership is

"Dissolved"

Do your own research on the meaning , context and consequences of

"Dissolved"

Btw

I assume that the former partner ship
Was not ICAEW or ACCA .

Any hint of dishonesty by 'c' would expect some report, not neatly side stepped. To avoid inconvenience.

From time to time one sees reports of professionals being excluded for fare dodging, or making inflated expense claims.
The firms reported this to their professional body.... dishonest conduct.

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By TheMonarch
30th Oct 2020 15:20

I don't believe they are chartered accountants.

I understand the concern regarding reporting. My understanding is that the responsibility of that falls solely on Mr A and/or Mr C. Mr B has no responsibility nor any duty to report anything as he wasn't involved in the business at the time. Agree?

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Replying to TheMonarch:
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By Paul Crowley
30th Oct 2020 15:39

Did he know?
ICAEW obligation to report

Other bodies are available

A and B could give C opportunity to screw up a good firm and again disappear with other peoples money
A and B need to speak with Chris Cope as a priority

The firm across the road had a Mr C type, no stain on record who defrauded HMRC through the firms client account

If they found out A & B pretended not to notice, I would expect the brown to hit the spinning thing

Are you seriously of the opinion integrity is not at issue in a regulated activity

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By TheMonarch
30th Oct 2020 16:21

The original partnership agreement was quite vague. It said that partners can draw any funds as long as they are available within the business. It didn't specify any limits nor did it prevent overdrawing of capital accounts. It did specify that should a partner leave or the partnership cease trading, any overdrawn capital would be repayable in full. After speaking to Mr A, they are being gentlemanly and agreeing that Mr C acted within the confines of the agreement.

Mr A and Mr B have already agreed that they will have a much more rigorous partnership agreement.

Unfortunately, due to personal circumstances, Mr C is unable to repay his capital in full, which was discussed with Mr A when conversing about leaving the partnership. Due to Mr A's financial position, he gentlemanly decided to allow Mr C to repay a large sum of money from the proceeds of selling his share of the business and the remainder over a period of time as a loan.

It doesn't appear that a crime has been committed in any way and the partnership agreement was adhered to. The agreement said the funds must be repaid upon leaving the partnership, but it didn't explicitly have a time frame included. Although Mr C should consider himself quite fortunate, both Mr A and Mr C are content with the outcome.

Mr B has been made aware that Mr C left the partnership a few months with an overdrawn capital account that as part of the original agreement is being repaid.

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