What is a partnership?
A partnership is one of the legal structures for forming a business and is an alternative to a sole trader or a limited company. There are different types of business partnerships: ordinary partnerships and limited liability partnerships. All partnerships have some similarities in that they will contain two or more partners (either as individuals or their businesses) who share the profits of the business as well as sharing duties and responsibilities. Businesses that are usually run as partnerships include: doctors, dentists and solicitors.
The partnership agreement
Most partnerships are governed by a “partnership agreement”, which is the contractual relationship between the partners of the business. In the absence of a partnership agreement, the business will be governed by the Partnership Act 1890. It is recommended that parties entering into a business partnership draw up a partnership agreement because the Partnership Act 1890 is a very old piece of legislation and does not protect against every possible outcome. For example, under the Partnership Act 1890, if one of the partners dies or retires the partnership is automatically dissolved.
A partnership agreement will allow you to depart from any of the terms of the Partnership Act 1890 and will help to avoid potential disputes. The partnership agreement should state things like how much each partner is contributing, how they will share profits, what their roles are going to be, what to do when a partner wants to leave, how to dissolve the partnership, how to admit new partners and how decisions will be made. If a partnership agreement is entered into then each partner should obtain separate legal advice.
Partnership rules for an ordinary partnership
There are no formalities for creating an ordinary partnership ie not a limited liability partnership; it simply requires two or more people “carrying on a business in common with a view of profit”. However there are some formalities regarding how the business conducts itself, for example, the names of the partners should be displayed to the public, such as on their website and letterheads.
Advantages and disadvantages of ordinary partnership
An advantage of a business partnership is the accounting and tax structure. Business accounts are not public records and partners complete their own annual tax returns like any other self employed person.
A major potential disadvantage of a business partnership is that partners are joint and severally liable for the business debts. This means that in the event of a partnership insolvency situation, creditors can come after each partner’s individual assets to pay off any outstanding debt, even if the debts have been caused by one of the other partners. Essentially, according to J E Baring, specialist insolvency lawyers, there is no protection for the partners should the business fail. Even a partner who has left the business can still be held accountable for the business if there is an issue surrounding something that occurred during their tenure.
Limited Liability Partnership (LLP)
A s seen above an ordinary partnership does not have many rules and is largely governed by the partnership agreement. However, limited liability partnerships have additional legal requirements.
A limited liability partnership (LLP) is more like a limited company in comparison to an ordinary partnership. LLP’s require at least two designated members who carry extra responsibility. If at any time there are less than two designated members then every member is deemed to be a designated member. LLP’s must also register with Companies House and they must file their accounts, which other partnership types do not have to do.
A key advantage of an LLP is that the partners’ liability is limited to the amount of money they have invested in the business along with any personal guarantees they have given, therefore they have more protection than ordinary partnerships. The LLP is an entirely separate legal entity from the partners as individuals.
Some businesses have “sleeping partners” who make financial contributions to the business but have no involvement with its day to day running.
Additional resource for partnership law.