Partnerships

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Partnerships Introduction

When two or more legal persons own and run a business, their business is known as a partnership and they are called partners. Partners do not have to be actual people; a Company can be a partner in a business.

Partnerships often occur in professional services such as doctors and solicitors.

Definition Of A Partnership

In England and Wales the Partnership Act 1890 defines a partnership as "the relation which subsists between persons carrying on a business in common with a view of profit".

Businesses that choose to operate as partnerships:

• Prefer to shares profit between the partners
• Accept the taxation liability for partnerships
• Like the duties, liabilities and rights partnerships impose on partners

The diagram below shows that partnerships have at least two owners known as partners. The role of the partners will depend on the type of partnership.

Different Types Of Partnership in the UK

There are three types of partnerships in the United Kingdom

• General Partnership - governed by the Partnership Act 1890
• Limited Partnership - governed by the Limited Partnership Act 1907
• A Limited Liability Partnership - governed by the Limited Liability Partnership Act 2000

General (Conventional Or Traditional) Partnership

As in the case of a sole trader the partnership has unlimited liability, this means that each of the partners are liable for the whole of any debt that the partnership incurs. This means that each of the partners is liable for not only the business debts that they create but also those of each and every person that is a partner in the partnership. Partners are jointly and severable liable for the debts of the business and fully entitled to all of the business profits.

Limited Partnership

In a limited partnership there will be at least one general partner and at least a limited partner. The general partner is responsible for running the business and their liability is unlimited. In a limited partnership the limited partner does not make business decisions or run the business, instead they are an investor entitled to share in the profits and the most they are liable for is the amount of money they have invested in the business.

Limited Liability Partnership

As the name suggests the partners in a limited liability Partnership have limited liability; they can share in the business profits but they are not personally liable for business debt. A limited liability partnership has to have at least two "designated members". Designated members are responsible for tax returns, tax registration and auditors. If a designated member does not meet their legal obligations they can be prosecuted. The legal personality of a limited liability partnership will depend on the country it has been set up in.

Setting Up A Partnership

In the UK to set up a partnership you will need to

• Select a name for the partnership
• Appoint partners and assign one of them as a "nominated partner"
• Register with the tax authority i.e. HMRC

The nominated partner will be responsible for retaining business records and needs to submit any tax returns that are due.

Legal Issues and Partnership Agreements

In the UK partnerships are controlled through the Partnership Act 1890. If the partners do not draw up partnership agreement detailing the rights and obligations of each of the partners, the Partnership Act will be used to resolve disputes and legal matters. agreement.

A partnership agreement is important as it details how the partnership will work. It is a critical document detailing the partners obligations and rights.

The partnership agreement does not need to be registered but you may need to register "The Partnership" with the relevant tax authorities such as HMRC in the UK, and the IRS in the USA.

What is Contained In Partnership Agreements?

A partnership agreement will usually state:

• Induction and retirement of partners
• Voting rights of each partner
• Rights, obligations and liability of each partner
• The amount of money each partner is investing in the business
• How the profit will be distributed amongst the partners
• The procedures that will be used to settle disputes between partners and
• Partnership dissolution procedures i.e. how the partnership will be terminated

In other words a partnership agreement contains all of the terms and conditions of the partnership that have been agreed by the partners.

Advantages of Partnerships

The advantages of a partnership include:

• The partnership benefits from the expertise and skills of each partner
• If each partner invests money in the partnership the business has greater financial resources to grow the business with
• It allows partners to specialise in specific areas for example a partner in a firm of solicitors may pursue personal injury whilst another advises clients about employer liability

Disadvantages of Partnerships

The disadvantages of partnerships include:

• Depending on how the partnership is set up a partner may be liable for the actions of other partners
• Possibility of disputes between the partners
• Business profits are split between each partner

Conclusion

As we have seen partnerships can be like a sole trader business but with more than one owner. So before entering a partnership agreement you should choose your partners carefully as not only will you have to work with them but you may be liable for their actions; other partners could grow your business but they could also jeopardise your business, risk your money and even leave you open to legal prosecution.

Finally all partners should select their partners carefully, choose a partnership type that reflects the type of liability they are happy to accept and seek legal advice before signing a partnership agreement.