Part­ner­ships, explained

Every company founder is faced with the question of which legal form is the right one for their company. In principle, the first choice is between a cor­por­a­tion and a part­ner­ship. As in the case of cor­por­a­tions, there are also different legal forms for part­ner­ships. Here, you can find out what a part­ner­ship is and what dis­tin­guishes it from a cor­por­a­tion. We also explain the ad­vant­ages and dis­ad­vant­ages of the different types of part­ner­ships.

A part­ner­ship is the merger of several “legal entities” that pursue a common goal. Depending on their legal form, these legal entities can be natural persons, legal bodies (usually cor­por­a­tions), or other part­ner­ships. A char­ac­ter­ist­ic feature of this kind of company is the close re­la­tion­ship between the company and the share­hold­ers. This is mainly due to the fact that these partners are usually per­son­ally liable without lim­it­a­tion, and this clearly dis­tin­guishes a part­ner­ship from a cor­por­a­tion.

The part­ner­ship has legal capacity, i.e. it can acquire property and also appear in court. Unlike a cor­por­a­tion, however, it is not a legal entity. This means that it does not legally exist in­de­pend­ently of its share­hold­ers. As the name suggests, the focus is on people involved, and the share­hold­ers and company are never com­pletely separated from each other.

Another dif­fer­ence between a part­ner­ship and cor­por­a­tion is the generally simpler legal framework for the formation and operation of a part­ner­ship. This makes it an at­tract­ive choice for start-up teams and project groups in par­tic­u­lar.

In contrast to a cor­por­a­tion, the legal ob­lig­a­tion of partners for the li­ab­il­it­ies of a part­ner­ship is not limited to their re­spect­ive capital par­ti­cip­a­tion. Rather, as a rule, they are per­son­ally liable, without limits. On the other hand, a part­ner­ship does not require a minimum con­tri­bu­tion from the share­hold­ers when it is formed.

If you make the decision to choose a part­ner­ship structure for your business, you may be saving money on re­gis­tra­tion and setup costs, but you will be taking a greater financial risk than with a cor­por­a­tion. In a limited part­ner­ship, some partners are liable as limited partners only up to their capital con­tri­bu­tion. However, there also must be one or more general partners, who, if necessary, are fully liable for the company’s li­ab­il­it­ies.

In a part­ner­ship, the partners manage the business them­selves (though this role is usually assigned to just one or two of them). In contrast, this is not ne­ces­sar­ily the case with limited companies: outsiders can also take over the man­age­ment of the company (as a so-called foreign entity). In part­ner­ships, this is not only possible in the form of rep­res­ent­a­tion.

There are a number of different types of part­ner­ship your business can take within the UK. These different types have their own char­ac­ter­ist­ics, relating to mem­ber­ship and liability. The following list will cover all you need to know about the different kinds of part­ner­ship options out there. Here is a list of part­ner­ship examples:

General part­ner­ships are the simplest, most common part­ner­ship structure. A general part­ner­ship consists of two or more general partners who are re­spons­ible for providing capital and equipment to start the business, and also share man­age­ment of the business. They are all involved in all aspects of the business and are all liable for any debts incurred. The degree to which each person is involved and liable is usually set out in a part­ner­ship agreement before the business is formed. General part­ner­ships also have important tax struc­tures. In a general part­ner­ship, the in­di­vidu­al partners are taxed sep­ar­ately, rather than the business itself.

Once you and your partners have decided to form a general part­ner­ship, you will need to choose a name for your business and check your chosen name’s avail­ab­il­ity with Companies House. It is also worth con­sid­er­ing whether you want to register your company’s name with the In­tel­lec­tu­al Propery Office to guarantee its pro­tec­tion.

There are a few bur­eau­crat­ic steps to take before you can open for business. You will need to register your business with the Companies House to ensure that you have given public notice of your company’s general in­form­a­tion. Your next step is to register with the Her Majesty’s Revenue & Customs (HMRC) to get register for Self-As­sess­ment taxation online or using form SA400 if you wish to register through the post.

You will also need to open a business bank account for your company. Contact your bank ahead of time to find out if there are ad­di­tion­al documents you require to open an account. Some banks ask for a fic­ti­tious name cer­ti­fic­ate (if the business’s name is not the name of the partners) or a copy of the part­ner­ship agreement.

Your final step is to ensure that you have obtained any and all relevant required business and trade licenses to operate your business. These vary depending on the type of business you have, so be sure to consult with your local au­thor­it­ies office to ensure that you have the right licenses. A guide can be found online here.

As always, if you are unsure or have any questions about setting up your general part­ner­ship, con­sult­ing with a spe­cial­ised business solicitor is the best course of action. This will guarantee that you have all your permits in order and are legally wa­ter­tight in terms of business op­er­a­tions and taxation.

A limited part­ner­ship is defined as a part­ner­ship in which not all partners are per­son­ally liable for the company’s li­ab­il­it­ies. What makes them different is that they are made up of general partners and limited partners. In the case of the limited partners, their rights in terms of the company are limited, and they are usually not allowed to par­ti­cip­ate in man­age­ment. They are simply there as silent investors, and are only liable up to the amount of their in­vest­ment (capital con­tri­bu­tion). There is no minimum amount for a capital con­tri­bu­tion, unless otherwise stated in the part­ner­ship agreement.

Like general partners, limited partners are legal entities, which may consist of persons, cor­por­a­tions, or other part­ner­ships. Since limited partners are only liable for the sum of their in­vest­ment, this makes the limited part­ner­ship an easy business structure to raise capital with.

The procedure for setting up a limited part­ner­ship is similar to a general part­ner­ship, however, limited part­ner­ships are also required to have a re­gistered agent (legal rep­res­ent­at­ive for limited part­ner­ship) and provide their name and address publicly so that you have a veri­fi­able point of contact.

According to the Limited Part­ner­ships Act of 1907, all limited part­ner­ships must be re­gistered with Companies House. The in­form­a­tion supplied on the form will include: the limited part­ner­ship’s name, office address, re­gistered agent in­form­a­tion, purpose of the limited part­ner­ship, value of all partners’ capital con­tri­bu­tion, and the names and addresses of all partners.

A re­l­at­ively new form of part­ner­ship is the limited liability part­ner­ship (LLP). This is a part­ner­ship where all the partners have limited liability, i.e. there are no true general partners. In this regard, although an LLP has a part­ner­ship structure, it in­cor­por­ates aspects of a cor­por­a­tion (par­tic­u­larly limited liability cor­por­a­tions).

In the United Kingdom LLPs are governed by the Limited Liability Part­ner­ships Act 2000 (in Great Britain) and the Limited Liability Part­ner­ships Act (Northern Ireland) 2002 in Northern Ireland. The rules governing this scheme were con­sol­id­ated across the UK with the Companies Act 2006, coming into effect in 2009. It was lobbied for by the Big Four auditing firms, all of which had converted by January 2003, limiting their liability for their audits.

If you are in­ter­ested in forming an LLP, the procedure is similar to a general or limited part­ner­ship, again with a few changes. First off the bat, you will need to ensure that your business qualifies to be an LLP. There are re­stric­tions on what pro­fes­sions may form an LLP.

You may need to register with Companies House – the process is the same as re­gis­ter­ing as a Limited part­ner­ship.

One of the reasons that part­ner­ships are such a popular business form is because of their taxation structure. Part­ner­ships are clas­si­fied as “pass through” entities for taxation purposes. This means that rather than having the business taxed itself, any income “flows through” to the partners and they are taxed on it as part of their in­di­vidu­al tax returns. This means that the business is not liable for corporate tax.

Once partners have re­gistered their part­ner­ship with HMRC, they simply pay tax on their profits through their personal self-as­sess­ment tax return forms.

While the business is not required to pay tax on profits itself, it may be liable for em­ploy­ment taxes if you have any employees. Depending on the kind of business the part­ner­ship is, it may also be liable for VAT for goods purchased.

Company founders can choose from a range of legal forms, depending on the pre­con­di­tions and pref­er­ences of their part­ner­ships. Here is an overview of the relevant ones:

If you have decided to form a part­ner­ship when setting up your company, further criteria come into play when choosing the right legal form. These include the type of activity, the size of the planned company, the partner’s personal pref­er­ences, the par­ti­cip­a­tion of other companies, and more. Here, you will find an overview of the typical ad­vant­ages and dis­ad­vant­ages of the various legal forms, which can help you in your choice of part­ner­ship.

Please note the legal dis­claim­er relating to this article.