Watford Solicitors

PARTNERSHIP LAW & PARTNERSHIP AGREEMENTS

Partnerships

Partnerships are used to establish a business relationship where profit and liability is shared between two or more parties.  They are most suitable for long-term arrangements and are formed through standard or specially drafted agreements.

What are the benefits of a partnership?

• Each partner is able to focus on their own specialty.
• Partners have a better chance of jointly raising finance than sole traders do on an individual basis.
• Responsibility for liabilities and debts can be shared.
• There are no legal formalities required, although to make sure you get what you want out of the partnership, we consider it essential to properly draft the partnership agreement.
• If one partner is absent, the others can cover for them.

Types of partnership

There are three types of partnership.  Let’s have a look at each one/

General Partnership

All of the partners are responsible for the liabilities and debts of the business, putting their personal assets potentially at risk.  Income is reported as a part of each partner’s income and the partnership enjoys a single rate of taxation.

Limited Liability Partnership

An LLP offers most of the benefits of a general partnership (income is taxed in the same manner) without the drawback of the partners being personally responsible for all the business’s debts and liabilities, unless it can be shown that business has been conducted recklessly.

Limited Partnership

In a limited partnership there is at least one general partner and one limited liability partner.

Limited Liability Partnership registration

All LLPs must be registered at Companies House and must follow certain rules such as publishing annual accounts.

Drafting a partnership agreement

Although you can use a standard partnership agreement to start a partnership, it is advisable to have a solicitor help you tailor the agreement.

Partnerships without agreements

Partnerships which are not formed on the basis of an agreement will be governed by the Partnership Act 1890.  Under this Act, partners are entitled to an equal share of the profits regardless of how much effort or skill they bring to the business.  Indeed, there are many potential drawbacks:

• The partnership can come to an end, without notice, if one partner wants it to end.
• The partnership will automatically come to an end if one of the partners dies.
• All partners will have an equal say in how the business is run.  Whilst this is democratic, it may not be appropriate for every business.
• All partners can be pursued individually for any liabilities and debts, meaning one partner can be wholly liable should the other partners declare bankruptcy.
• Each partner will be classed as an agent, meaning they will have the power to legally bind other partners to customers and third parties, even if the deal they made was a less than favourable one.