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.

What is a partnership?

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.

Definition

A partnership is an association of at least two legal entities for the pursuit of a common business goal. The basis of this merger is a partnership agreement. In this kind of company, partners are personally liable without limitation (with certain exceptions).

Minimum deposits and liability

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.

Management

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.

A range of legal forms

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 partnership

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.

Limited partnership

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.

Limited liability partnership (LLP)

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.

How are partnerships taxed?

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.

Overview of the various forms of partnership

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:

Legal form Acronym Characteristics Typical application examples
General partnership GP (rarely used) Merger of at least two legal entities for the purpose of a joint commercial activity, partners fully liable for company debts, partners can act individually in managing the business registration with the Secretary of State Small businesses, manufacturers, trade and craft enterprises
Limited partnership LP (rarely used) Merger of at least two legal entities for the exercise of a joint commercial activity, general partners are personally liable without limitation, limited partners are only liable up to the amount of their equity contribution, limited partners do not participate in the business other than capital contributions Companies in which not all partners are equally liable, e.g. capital providersParticularly suitable for family-owned businesses where responsibility is not to be shared equally in the event of inheritance
Limited liability partnership LLP Merger of at least two legal entities for the exercise of a joint commercial activity pertaining to their specific professions, must register with Companies HouseThe partners are only liable for unlimited and joint liabilities; each partner is individually liable for professional mistakes. Freelancers, e.g. journalists, doctors, architects, lawyers, engineers, tax consultants, business consultants

Advantages and disadvantages of different partnerships

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.

Legal form Advantages Disadvantages
General partnership All partners have an equal stake and say in business activities and profits, flow through taxation All partners are fully personally liable for company debts
Limited partnership Limited partners are only liable up to the amount of their capital contribution, easy and relatively secure way to invest in a company, fewer partners involved in management, flow through taxation Limited partners may have high influence without the liability, general partners personally liable for company debts
Limited liability partnership No shared liability for professional mistakes by other partners, low running costs, flow through taxation Often limited to individuals within a certain profession, may be required to take out additional insurances or file additional paperwork

Please note the legal disclaimer relating to this article.


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