Types and formation of partnerships
English law recognises three different types of partnership:
General partnerships are governed by the Partnership Act 1890 (PA 1890). A general partnership is a type of business arrangement that consists of two or more people, corporate entities or both ‘carrying on a business in common with a view of profit’. Partners involved in the running of the business are known as ‘general partners’ and the partnership has no limit to its liability for debts and other obligations.
The rights and obligations of the partners are usually set out in a written partnership agreement but can be agreed orally. In the absence of agreement the PA 1890 sets out the rules that apply.
Limited partnerships (LPs) are governed by the Limited Partnerships Act 1907.
Unlike a general partnership, an LP may designate certain of its partners as limited partners. Limited partners must not (except private fund limited partnerships) be involved in the day-to-day running of the business but in return are only liable up to the sum of money they have agreed to contribute to the LP as capital.
Limited liability partnerships (LLPs) are, in essence, a hybrid between a traditional partnership and a company. They are governed by the Limited Liability Partnerships Act 2000 and the Limited Liability Partnership Regulations 2001, which set out default rules in the absence of agreement to the contrary, as well as certain provisions of UK company and insolvency law.
Differences between types of partnership
Each partner is considered the agent of the other in relation to the firm’s business. As such, they have the authority to bind each other into binding contracts entered by one of them. All partners are also jointly liable for the debts and obligations that the firm incurred while they were partners. They are also jointly and severally liable for loss arising from any partner’s wrongful or negligent act or omission: a third party suffering loss can sue and recover damages from any one or more of the partners. The partners have unlimited liability: if the firm does not have sufficient assets to pay its debts or other liabilities, then the partners will be required to make good any deficit out of their own personal assets.
All the above characteristics apply to LPs, save that LPs will have limited liability.
An LLP, on the other hand, is a body corporate with a legal personality separate from its members An LLP is akin to a company in that it can sue and be sued and hold property in its own name, and both are required to file financial statements and register changes in membership and in persons with significant control with Companies House. The key differences between an LLP and a company are that:
- an LLP does not have registered shares: a partner’s interest in it is typically limited to any contractual rights provided by the members’ agreement (or, in the absence of a members’ agreement, the rights provided by the statutory default rules);
- where the rights of partners are governed by a members’ agreement, this is not publicly available (unlike company articles of association); and
- LLPs, unlike companies, do not pay tax on their profits: save for certain non-trading LLPs, they are tax-transparent entities. Partners pay tax on the share of the profits of the LLP allocated to them respectively.
Reasons for choosing a partnership structure
The key reasons for operating via a partnership structure are:
- All general partnerships, LPs and LLPs (except certain non-trading LLPs) are ‘tax transparent’. The general partnership, LP or LLP is not liable for tax on the profits generated by its business.
- A partnership also benefits from a greater degree of privacy in respect of its business than a company does: general partnerships and LPs are not required to file public financial statements and their constitutional arrangements (including the partnership agreement) remain private.
- Equally, LLPs may keep their members’ agreements private, but are required to submit financial statements annually to Companies House.
- General partnerships, LPs and LLPs benefit from a greater degree of organisational flexibility than a company. A partner’s interest in the business is purely contractual and entirely a function of the terms set out in the partnership or members’ agreement. This makes it much less onerous administratively to vary partner profit shares, voting and the amount of capital that partners are required to contribute.
A general partnership comes into existence without the need for registering with an external authority. General partnerships must, by definition, consist of at least two partners carrying on ‘a business in common with a view of profit’ (s1(1) of the PA 1890). No partner is required to be UK resident. A partnership agreement is only indicative that a partnership relationship has arisen and not of itself conclusive.
LPs must be registered at Companies House by submitting a Form LP5. An LP must, by definition, consist of at least two partners of whom at least one must be a general partner. No partner is required to be UK resident. If a proposed LP fails to register, it will simply be a general partnership and no partners will enjoy limited liability.
An LLP is formed by incorporation at Companies House, by submitting form LL IN01. The LLP is incorporated once Companies House has issued a certificate of incorporation. Although an LLP is not required to have a board of directors, two or more of its members must be ‘designated members’. Their function is to deal with various administrative matters required by statute, such as Companies House filings and the maintenance of registers. LLPs must have a registered office in England or Wales and must have two or more members. No member is required to be UK resident.
There are no restrictions on the types of business that can be operated by any of these three vehicles, as long as the business can be legally operated; although, some are more widely used in some businesses than others.
If you are thinking of starting a business with someone or want to know more about partnership law please contact our specialist team here at Onyx solicitors, on 0121 268 3208 or email us at email@example.com with your query.