A partnership is a business structure in which two or more people work in business together with a view to making a profit. This means sharing the risks of the business, such as the responsibility for bank loans and other credit, as well as the profits it makes. Unlike a limited company or limited liability partnership, a partnership is not legally separate from the partners.
In the majority of cases, partners manage the partnership themselves. However, a partnership can have employees to whom managerial tasks are delegated.
The Role of Partners
There must be at least two partners in a partnership. At least one partner must be a ‘general partner’ who invests in the business and runs it on a day-to-day basis. Other partners may be investors only (known as dormant or sleeping partners) and it is also possible to have corporate partners (i.e. a partner that is a limited company).
In terms of financing the partnership, each partner normally introduces capital from his or her own assets or obtains a loan in their own name. Sometimes, the partnership has one or more dormant partners who are not concerned with its management or running. As each partner remains self-employed, each is taxed on his or her share of the partnership’s profits and also pays their own National Insurance Contributions.
Advantages of a Partnership
A partnership affords its partners a flexible and simple way in which to operate in business together. There are no requirements to register the partnership with Companies House and there are no obligations relating to filing statutory records, such as annual returns or accounts. It is important to note that partnerships should be run with a view to making a profit, so this structure is not suitable for most charities or members’ clubs.
Disadvantages of a Partnership
If the business fails or there are financial problems, a partnership offers the partners no legal protection against the liabilities of the business. Each partner is jointly and severally liable for the partnership’s debts. This means that a creditor can seize a partner’s personal assets in order to pay off debts of the partnership. In the event of default, a creditor may go after the partner with the greatest personal assets, even if the debts were accrued by another partner.
Creditors have the option to wind up the partnership and/or make individual partners bankrupt.
What If Things Go Wrong?
A partnership is a long-term relationship between two or more people and it can be easy, especially at the beginning, to assume that things will run smoothly. However, all businesses change and develop over time and it is advisable to have an agreement or ‘deed of partnership’ in place at the outset, setting out the rights and obligations of each partner. This can be especially important in the event of a dispute or a change in circumstances of one or more of the partners.
The Deed of Partnership
There is no legal requirement for partners to have a deed of partnership in place. However, such an agreement serves as proof of the existence of the partnership and governs the relationship between the partners. It can cover working arrangements, profit share, investments made by each partner and what to do when partners retire or new partners enter the partnership.
Partnerships that are growing rapidly or increasing their borrowing are likely to benefit from incorporation. If you would like advice on the best way to protect yourself and your business interests, contact us.