There's more to partnerships than meets the eye
I have been acting as a sole trader for many years and am thinking about taking on a partner in the business. There seem to be different types of partnership. What are the different types of partnerships and the main differences between them?
There are three types of partnership — ‘ordinary’ partnerships, limited partnerships and limited liability partnerships or LLPs.
There are more similarities than differences between the various types of partnerships. For example, all types have to have two or more persons who share the risks of the business together with the costs.
A partner can be an individual or a corporate and the profits are shared among the partners unless there is an agreement to the contrary.
Partners are each personally responsible for paying tax and National Insurance on their income from the partnership.
In terms of tax, each partner is subject to self-assessment and a partnership return must be completed annually.
A simple concept but often misunderstood, an ‘ordinary’ partnership has no legal existence distinct from the partners themselves. Therefore, dissolution occurs if one partner resigns, dies or goes bankrupt. In addition, the partners are liable jointly and severally for the debts.
If someone leaves a partnership, those remaining behind can be left with the entire debt unless there is an agreement to the contrary and partners are not safeguarded if the business is unsuccessful.
A limited partnership is a combination of ordinary partners and limited partners. A limited partner’s liability is limited to the sum they have invested in the business and to the limit of any personal guarantees.
Ordinary partners are jointly liable for any debts owed by the partnership and are equally responsible for paying off the entire debt of the business.
Limited partnerships must register with Companies House but don’t generally have to make an annual return or file accounts.
Limited liability partnerships (LLPs)
LLPs must have at least two designated members and register with Companies House. An annual return has to be filed at Companies House along with accounts.
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 to raise finance which affords a limited liability partner with protection.
Before forming any type of partnership, the fundamental piece of advice is to ensure a written agreement is put in place between the partners to govern the relationship. In the case of a two-person partnership which is run on a 50/50 basis, it becomes impossible to govern in the case of a dispute and in the absence of a clearly worded agreement. To answer the above question, it will really depend on the sums generated by the business and the overall commercial risk of the intending partners.
David Wilson is a commercial partner of Worthingtons Solicitors Belfast. David specialises in commercial property, telecoms and commercial law. David advises a number of UK-wide corporate clients and Northern Ireland businesses and currently sits as a board member on the board of three arts organisations