A partnership is where two or more persons, the partners, enter into business together and share the risks, costs and responsibilities of being in business. A partner can be an individual or another business e.g. a limited company or another partnership.
There are three types of partnership:
- Ordinary Partnerships – an ordinary partnership does not have legal existence separate from the partners. Consequently in the eyes of the law it is not a separate legal entity like a company. Unlike the directors of a limited company, partners in an ordinary partnership have personal liability for all of the debts of the partnership.
In an ordinary partnership if the partnership has debts, the partners are jointly liable for the debt owed and so are equally responsible for paying off the whole debt. Creditors can claim a partner’s personal assets to pay off any debts, even those debts caused by other partners. Therefore, in an ordinary partnership the partners’ personal assets are not protected in the event that the business fails.
- Limited Partnerships – a limited partnership is made up of a mixture of ordinary partners and limited partners.
In a limited partnership ordinary partners are jointly liable for any debts owed by the partnership and so are equally responsible for paying off the whole debt. However a limited partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.
- Limited Liability Partnerships (LLPs) – a LLP is a hybrid between a company and a partnership in that LLPs must register with Companies House, send Companies House an annual return and file accounts with Companies House.
LLPs have the advantage of limited liability, partners are not personally liable for the debts of the partnership. In a LLP a partner’s liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given. Thus partners have some protection if the business fails since the partners’ personal assets are protected to a certain extent.
A Partnership Agreement is a contract between the partners of a business.
There is no legal requirement to enter into a partnership agreement as the law will automatically impose a default set of rights and obligations to govern the partnership and the relationship between the partners if they don’t. Consequently partnership agreements are voluntary; they set out the rights and obligations of the partners and regulate the relationship between the partners with the aim of protecting the partners’ investment in the business.
In order to avoid costly disputes we recommend to enter into a written partnership agreement as it lets the partners know where they stand in relation to each other and the business. Also, since in the absence of a written partnership agreement the law will impose a default set of rights and obligations on the partners, having a written partnership agreement in place gives the partners the opportunity to vary or exclude the default position.
A partnership agreement sets out detailed and practical rules in respect of the partnership and its partners. Generally the agreement will:
- regulate the partners’ investment in the business;
- protect the partners’ interests and secure the future of the business;
- set out whether property used by the partnership belongs to the partnership or to individual partners;
- provide a written structure for the business clearly setting out each partner’s responsibilities, rights, profit/liability sharing, rules relating to business entry and exit, and also the terms on which disputes are resolved and the partnership can be terminated;
- set out how the partnership is going to be run;
- regulate how important partnership decisions are to be made, and
- help avoid costly misunderstandings and conflicts.
A partnership agreement will make the day-to-day operation of the partnership smoother and prevent problems from escalating into full-blown crises. It formalises the partnership arrangements allowing the partners to agree on how to handle particular situations before they arise. A badly drafted or non-existent partnership agreement may expose partners to a range of potential issues, leading to an unsuitable business structure and ultimately to partnership dissolution.
The Legal Stop has a several partnership agreements each fully comprehensive and specifically drafted for the particular type of partnership that you are intending to establish, whether an ordinary, limited or limited liability partnership. For more information please visit our website www.thelegalstop.co.uk.