Partnerships

CHOOSING THE BEST OWNERSHIP STRUCTURE FOR YOUR BUSINESS: PARTNERSHIPS

One option is to start a business with a colleague or friend. You might each have different skills to bring to the enterprise. When you go into business with someone else, this is usually known as a 'partnership'. Each partner can own an equal share or some may have a larger proportion of the business than others. In a partnership, you are liable for the debts of the business in proportion to how much of it is yours. 

Unlike other business formats, partnerships (and sole traders) can start trading immediately, although certain types of businesses may need a licence to trade. If trading under a name other than that of the owners, you must display names of owners and an address, for each, at which documents can be served. After sole-traders, a partnership is the second most popular type of business and is commonly associated with professional services such as accountants, solicitors and doctors. It is also common in partnerships for each partner to specialise in a specific area of the business. For example, in an accountancy service, one partner may specialise in bookkeeping, while another may specialise in financial advice etc.

You should be aware that as any decisions and actions are dependent on the agreement of the other partners, certain conflicts may arise from time to time. Such conflicts have led to partnerships failing and so it is important that some control be maintained by compiling a 'partnership agreement' prior to starting the business. 

Types of Partnerships: The General Partnership
The General Partnership, as outlined above is subject to The Partnership Act, 1890. Full partnerships, as outlined above, have between two and twenty partners, but typically, the number of partners in a full partnership is between two and four inclusive. 

Another option could be an arrangement in which two or more individuals or other persons (such as a company and an individual) conduct a business as partners, whether officially or not. In terms of asset protection, general partnerships can be more problematic than sole proprietorships. Anything that one partner does can affect all the partners, because each partner in the general partnership is personally responsible for all obligations of the partnership deals. 

The Limited Partnership: 
A Limited Partnership is subject to The Limited Partnership Act, 1907. Limited partnerships are very rare today and account for less than 1% of all partnerships in the UK. A limited partnership is formed when one or more of the partners invests capital into the business but does not participate in running and managing the business. These partners therefore have limited liability as they can only lose the amount of money that they initially invested into the business. 

A Limited Partnership (LP) is an association of one or more general partners together with one or more limited partners conducting business for profit as co-owners. The most important feature of a LP is that the limited partner enjoys limited liability as long as s/he does not participate in the control of the partnership business. The general partners of the LP are the ones who are responsible for the obligations of the LP. 

In a limited partnership, it is the general partner who remains liable for the debts and obligations of the partnership. For larger risk exposure, a company (corporation) may be formed to serve as the general partner. A corporate general partner is protected from direct attack by a judgment creditor because the ultimate liability for the debts and obligations rests with the shareholders. By spreading share ownership, individual exposure is considerably reduced. Even without a corporate general partner, risk can be spread by distribution of limited partnership shares. If a judgment creditor obtains a charging order against one partner, the order goes to that partner's share in distributions from the partnership, and not to the entire business. 

Limited Liability Partnership (LLP):  
An LLP is similar in some ways to a standard Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business. There are more administrative duties involved compared to the Partnership business structure. In fact, an LLP is more similar to operating a Limited Company. In terms of liability, the Limited Liability Partnership is itself liable for debts creataed in running the business, rather that the individual members of the LLP. As a result, LLP's are only recommended for profit running businesses. 

An LLP may be formed by two or more persons (individuals or companies, and not necessarily UK residents) to carry out a trade or business. To form an LLP, the partners have to file an incorporation document at Companies House. The owners and managers of an LLP are the same. The management structure and relationship between the partners is a matter for agreement between them and may be recorded in a separate LLP Agreement, similar to a Partnership Agreement. 

LLP Advantages: 
 No personal liability as a member for the LLP's debts and contracts  
 No joint liability for the negligence of any member 
 As a separate legal entity, LLP's may own property, sue, and be sued in LLP's name 
 The members' liability to contribute to the closing down of a company is limited to the amount they agree to contribute in the event of the closure as recorded in the LLP agreement. 

LLP Disadvantages: 
 Disclosure: information (in particular accounts and an auditor’s report) must be filed with the Registrar of Companies and becomes public 
 Money and property contributed to the LLP becomes owned by the partnership unless otherwise stated and the contributor is not entitled to its return except as stated in the partnership agreements 
 Regulations: auditing and filing requirements.