Article

Partnerships

There are three different types of partnership available in the UK. These are

• General partnerships

• Limited Partnerships and

• Limited Liability Partnerships.

Generally a partnership will have at least 2 or more partners; all partners participate in the management of the business and share in the profits of partnership. Each partner is an agent for the other when making contracts on behalf of the business, all partners are liable for the debts of the business except for Limited Liability Partnerships.

A partnership would normally have a document drawn up which states the rights and obligations of the partners called the ‘The Partnership Deed’. Although it is not necessary, it may be a good idea, that way each partner knows what is expected of them. As well as giving basic information, such as business name, names of partners it will usually also set out the amount of capital each partner contributes, the way profits will be shared and whether any are to be paid a salary, the working arrangements, and how changes to the partnership are carried out like appointing new partners and what happens should a partner die or want to leave. If no partnership agreement exists then a partnership is dissolved by one partner giving notice to the others of his intention to dissolve the partnership or automatically by the death or bankruptcy of one partner.

Tax implications – each of the individual partners should register with HMRC as self-employed and their share of the profits are considered as income and should be filled in on the partners self assessment form each year. The partner then pays tax at the taxable rate they are at for their annual income. If a company was a partner then they would pay corporation tax on their partnership profits. There is also a Partnership Tax Return which shows the partnerships income and expenses and how the profits or loses have been divided amongst the partners.

General Partnerships

A general partnership is an agreement between 2 or more persons coming together to form a business, it is not a legal entity in its own right. Unless the Partnership Deed states otherwise all partners are equal. If no deed exists then the partnership, is governed by the Partnership Act 1890. There is no need to register the name of a general partnership or file the deed anywhere. The cost of setting up a general partnership will depend on how complicated the partnership agreement is and whether you use a lawyer to draft it for you, or whether you purchase a standard agreement and modify it to suit your needs.

Limited Partnerships

Limited Partnerships have two different classes of partner, a general partner and a limited partner. They are governed by the Limited Partnerships Act 1907 and can have a minimum of 2 and a maximum of 20 partners, also there are some exceptions for professional partnerships. General partners handle the day to day running of the partnership and are liable for all the debts and obligations of the business, while limited partners are usually only investors either putting in capital or property and are only liable for the debts and obligations of the business up to the amount they contributed. Also limited partners cannot draw out or receive back any part of their contribution during the lifetime of the partnership or take part in the management of the business or have power to bind the firm, if they do then they also become liable for the debts, in effect they remove their limited liability. This form of partnership is not a legal entity in it’s own right so cannot contract or sue or be sued or hold property. It operates in the same legal framework as a general partnership.

There is no legal obligation to have a formal written document between the partners, but it is probably wise to do so. If there is no agreement then again the Partnership Act of 1890 applies. An individual or a company can be a partner either as a general or limited partner; however a person cannot be both at the same time. Limited Partnerships do have to be registered where their principal place of business is, with Companies House, and file a statement (form LP5) which is signed by all partners. There are no annual filing requirements, but if any of the partners, partners’ details or partners contributions are changed then these have to be notified to the Registrar. The general partners are responsible for the delivery of these forms. Because the partnership has to be registered naming is governed by the Business Names Act 1985 and has to have a name that is acceptable to the Registrar and it will not be able to be the same or similar to any other Limited Liability Partnership or company on the register.

The tax implications are the same as for general partnerships, with capital losses being offset against capital gains elsewhere.

Limited Liability Partnerships

This is a legal entity which came into force in 2001. They are governed by a specific act of parliament the Limited Liability Partnerships Act 2000, and in the Limited Liability Partnerships Regulations 2001. LLP’s are available to business that want to be considered a partnership and is being carried out with a view to a profit. The types of business they were originally designed for included professional partnerships like lawyers, surveyors and accountants, whose restrictions from their professional association’s means they cannot incorporate as limited companies. There are a number of benefits of an LLP over the other types of partnerships:

• Key advantage is that LLP members are able to limit their personal liability if something goes wrong with the business, in the same way as limited company shareholders do.

• Each member takes an equal share of the profits, unless the members agreement specifics otherwise.

• Individual Members of the LLP treat their profits as personal income for tax purposes. The LLP is not taxed.

• Members Agreement drawn up between members, does not have to be filed at Companies House, can be more flexible in setting out member rights and income percentages etc.

• The LLP being a separate entity is able to enter into contracts and hold property and can continue in existence independent of changes in membership.

• Partners have greater protection from rush of creditors demanding money from them personally if the business should collapse.

Considerations to take into account when considering forming an LLP should include:

• Anyone lending money to the LLP may still require personal guarantees from the members, just as they do with limited companies.

• If converting an existing partnership to an LLP, any overdraft the existing partnership has, will need the Banks consent to transfer it to the new LLP. Similarly landlords consent will be required to transfer a lease. They may want a partner or all partners in the business to offer personal guarantees.

• The treatment of annuities may cause difficulties preparing accounts on a ‘true and fair’ basis.

• You will need to publish financial annual accounts with a similar level of detail to a similar sized limited company and have to submit them each year at Companies House to a strict time table.

• An annual return of members is also required with a fee of £30.

• The legislation also requires that the profit share of the highest earning member is published if the LLP’s profits exceed £200,000.

• Another area of consideration is insolvent trading, in the same way that Company Directors can be prosecuted for these offences, so can members of an LLP.

See Also:

Preparing For Business

Naming Your Business

Photography Business Topic Section