As per section-1 of the 1890 Partnership Act, the partnership can be defined as: “the relation that subsists among individuals running a business with the common aim of profit”. It’s virtually unimaginable to sustain a business structure as being cooperative without a minimum of 2 individuals.
If a particular partnership falls to less than two persons for some reason, for example when there are just two partners and one dies, the partnership will be considered to be dissolved. In this case, the other person may elect to continue a business being a sole trader or form a limited company. Also, they will have the option to add another partner and establish a new partnership.
Sharing Responsibilities, Profits As Well As Losses
When it comes to specific agreements, each partner is entitled to set up business plans and manage them with the other partners. Each member will be liable for any omissions/activities of the other members acting “within the regular course of a company” (as per section ten of the Partnership Act).
Regarding the profits and losses, they’re typically shared out in equal amounts among the partners except when agreed otherwise. Also, there may be some exceptions in regards to Limited Liability Partnerships. Every partner is equally responsible for all the liabilities and debts of the partnership.
Individual Payment Of Taxes
For tax purposes, partnerships are likely to be transparent; there is hardly any tax that’s levied upon the partnership itself. Instead, every partner is liable to pay their income tax as per their share of expenses & profits.
Types Of Partnerships
1. Ordinary Partnership
The majority of the partnerships fall within this category, as per the 1890 Partnership Act. This partnership isn’t an independent legal entity. Instead, it is a collaboration of at least two persons running a business together.
All the partners act for one another while entering and negotiating into agreements with 3rd parties. Each partner is jointly liable for any obligation or debt of a general partnership, with no limitation. In case the partnership is prosecuted, each partner will be pursued independently by a lender who wants to recover any dues.
Each partner owes one another fiduciary duties, which includes the below undertakings:
- Full info & render accounts in association with the partnership (under the 1890 Partnership Act section 28)
- Account for individual profits made whilst the business was fully operations (under section 29)
- Avoid competing with the partnership except for the consent of the rest of the partners – and to offer any profits made (under section 30)
Most partnerships are likely to have some sort of agreement to set out the different responsibilities of each partner, which includes stating any bespoke profit sharing, steps to undertake in the event one of the partners decides to leave, etc.
LLPs can be considered an amalgamation of a private limited firm and ordinary partnership since it combines the advantages of both types of business structures.
As opposed to a typical partnership, LLPs are considered incorporated firms and, thus, they’re deemed to operate as an independent legal individual. An LLP can borrow cash and own assets as an individual entity.
Like any other partnership, Limited Liability Partnerships need to have a minimum of 2 individuals, who are called ‘members’ (or partners). An LLP may have any number of regular partners; however, there should be no less than 2 ‘designated partners’ who will be accountable for:
- Hiring an auditor (whenever possible)
- Setting up VAT in case the yearly turnover is likely to cross the £85,000 mark
- Maintaining accounting stats
- Setting up, signing & forwarding yearly account records to the Companies House
Forwarding confirmation records to Companies House
- Ensuring that Companies House is updated with the required administrative info, for example, if the registered address or name changes, etc.
- Acting on behalf of an LLP in case it is dissolved
The most significant benefit of forming a Limited Liability Partnership is that its participants aren’t individually liable for any charges incurred due to the partnership. Plus, as opposed to an ordinary partnership, fiduciary charges are typically not owed among the members. Instead, they will be owed by every member to the LLP.
Also, profits generated by the LLP will be distributed to members who are accountable for paying their individual income tax.
Steps For Incorporating An LLP:
- It’s essential not to choose an identical name to other businesses that are already registered or too offensive. It needs to end in ‘LLP’.
- You need to have a registered address where official correspondence will be sent. You’re required to have a physical address in a country where the LLP is set up. You’ll have an option to use PO Boxes; however, it’s essential to follow them up with a physical address. The address is likely to be in the public domain.
- It’s necessary to register an LLP electronically, you can form your LLP here.
- You must also have no less than two designated members.
- Try to make your LLP agreement (identical to a shareholder’s agreement) that showcases how the LLP should operate
3. LP or Limited Partnership
Even though LLPs are among the least known business structures within the United Kingdom, partnerships with a structure identical to limited liability can be seen since the 1907 Limited Partnerships Act, even though they’re seldom used nowadays. LP is unlikely to have its legal status. Also, it is not an incorporated business entity.
Independent partners may still be accountable for entering into agreements in place of other partners. Nonetheless, when it comes to an LP, you may designate a few members as ‘limited members’ who won’t have any role to play in the partnership management and, most importantly, have restricted liability for any charges incurred as a result of a partnership.
Limited members, sometimes called sleeping members, are typically investors who aren’t ready to take a regular part in operating a business. A minimum of one member in an LP should be a non-limited member (recognized as a ‘general member’) – they’re likely to have unrestricted liability.
Which Of The Above Partnerships Is Most Suitable For Me?
Most likely, you’ll be required to pick any one of the below types of partnerships
1. An LLP
2. An ordinary partnership
So, it is beneficial to take into account the positives and negatives of both types of partnerships:
1. Restricted liability of members.
2. Incorporation indicates the business will have its independent legal entity.
1. Obligation to run an incorporated firm, e.g., annual filings.
2. Disclosure of income is obligatory.
B. Ordinary Partnership
1. As this partnership is not incorporated, you’re likely to have minimal associated and administration costs.
2. Accounts aren’t required to be made accessible to the public. This can help if this info may prove beneficial to the competitors.
1. Each partner is independently accountable for any charges incurred as a result of the partnership.
2. The Ordinary Partnership won’t have its individual legal personality. Thus, it cannot borrow sum or trade independently.
The last option – LP, in actuality, was only beneficial before the LLP’s that came into the scene in the year 2001. The majority of the individuals who might have elected to set up a Limited Partnership would instead pick an LLP.
The partnerships must come up with a specific agreement or an LLP agreement if you have an LLP. These agreements set down guidelines under which an LLP must operate and comprises matters like:
- Profit shares.
- Contribution of capital by each member/partner.
- Decision making and partnership management.
- Managing the exit of one of the members.
- Defining partner liabilities.
It’s important to remember that ‘default provisions’ are contained within the LLP Regulations 2001 that govern some aspects of operating an LLP if an LLP agreement is absent. A partnership agreement can ensure the steady operation of business besides offering a way of resolving several disputes that may arise while running a company.