Setting up in business as a partnership
Setting up a new business is an exciting time, and there are numerous things to think about, but if you are launching your new venture with one or more other people it is really important to decide in advance how you are going to structure the business legally.
One popular option is to have a partnership of which there are three types in the UK:
- ordinary partnerships;
- limited partnerships; and
- limited liability partnerships (LLPs).
Which partnership type is best for you?
The most popular form of partnership in the UK is an ‘ordinary partnership’, which means there are two or more people carrying on business together. An ordinary partnership has no legal existence distinct from the partners themselves.
Each partner acts on behalf of the other partners when negotiating and contracting with third parties, and all partners owe each other a fiduciary duty as set out in the Partnership Act 1890. This includes undertakings:
- not to compete with the partnership without the consent of the other partners;
- to account to the partnership for any personal profits made during the course of partnership business; and
- to provide accounts and full information regarding the partnership.
Pros: since they are not incorporated, ordinary partnerships lack the formality of a limited company and tend to be easier and cheaper to start up, as administration and associated costs are lower. Accounts do not need to be made publicly available, which may be beneficial if this information could be valuable to competitors.
Cons: all partners are jointly and severally liable for any debts and obligations of the partnership as a whole, without any limitation. Consequently, if the partnership is sued creditors can pursue each partner individually to recover the debts. In addition, because an ordinary partnership is not a legal entity, it cannot trade or borrow money on its own account.
Limited liability partnership (LLP)
Governed by the Limited Liability Partnerships Act 2000, LLPs are basically a mixture of an ordinary partnership structure and a private limited company, combining some benefits of both.
They can have any number of members (essentially partners), but at least two must be ‘designated members’ to oversee financial matters, such as maintaining accounting records, sending annual accounts and information to Companies House, and acting for the LLP if it is wound up.
Pros: members are not personally liable for any debts incurred by the partnership and unlike an ordinary partnership, fiduciary duties are usually owed to the LLP not to the other members. Since an LLP has its own legal personality, it can own assets and borrow money in its own right.
Cons: running an LLP involves onerous duties similar to running an incorporated company, such as annual filings, and unlike an ordinary partnership, income must be disclosed.
Governed by the Limited Partnerships Act 1907, limited partnerships were popular in the 1980s, but waned in popularity when they became more heavily regulated and when LLPs were introduced. They are rarely used now.
Like an ordinary partnership, a limited partnership does not have its own legal status and individual partners are responsible for entering into contracts on behalf of other partners. The key difference is that a limited partnership allows certain partners to be designated as ‘limited partners’ who do not take part in the running of the partnership; their liability for debts is limited to the capital they contribute. At least one partner must be a ‘general partner’ with unlimited liability.
Pros: they have informal articles of association and can therefore be set up relatively quickly. They are good for investors who have no interest in managing the partnership and want to limit their liability.
Cons: a limited partnership must be registered with Companies House and a number of relevant business permits and licences obtained which can be costly. There is a heavy burden on the general partner who has sole responsibility for running the business and is liable for any residual debts not covered by the limited partners.
Whatever partnership you opt for, it is important to have a partnership or an LLP agreement in place, to assist in the smooth running of the business and help resolve disputes if they arise.
The agreement should set out the rights and responsibilities of individual partners, including matters like the capital contribution of each partner, how profits will be split and decisions made, and the process to be followed if a partner leaves.
How we can help
Setting up a partnership can be complicated so it is highly recommended that you consult a specialist solicitor before you embark on your new venture.
They can explain all the options to you, ensure all the necessary paperwork is correctly drawn up, make sure your interests and assets are protected and draw up a bespoke partnership or LLP agreement to ensure the needs of everyone involved in the partnership is met.
If you would like any more information about partnership, please contact
Clare Richards – email: firstname.lastname@example.org or
Victoria Spellman – email: Victoria.email@example.com
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.