Defining partnerships
A partnership is the relationship of two or more 'partners' carrying out a business with a view to making a profit. You and your partners are responsible for running the business and you share profits between yourselves. You and your partners are personally responsible for paying the bills (apart from LLPs). Partnerships (apart from LLPs) are not separate legal entities.
A partner doesn't have to be an actual person, for example, a limited company counts as a legal person and can also be a partner in a partnership.
Types of partnership
There are various types of partnership arrangements so you need to think carefully about what type will suit you best.
Ordinary partnership - you and your partner(s) personally and jointly share responsibility for the running of the business.
Limited partnership - liability for debts can fall to specific partners rather than be shared equally (ie general partners, as opposed to limited partners, are responsible without limit for all debts and obligations of the firm).
Limited liability partnership (LLP) - this is more like a company where partners are not personally liable for debts and liabilities. An LLP is considered to be a corporate body that exists as a legal ‘person’ independently of the partners.
Scottish general partnership - if you are based in Scotland, you can make use of this type of partnership in which each partner acts as an agent and binds the partnership. The Scottish general partnership has a separate legal personality from the partners. However, every partner has unlimited liability to creditors for all the partnership’s debts.
Scottish limited partnership (SLP) - if you are based in Scotland, you can make use of this unique type of partnership. Partners are taxed on their share of partnership income and gains according to their profit-sharing ratios. These partnerships are commonly used in private equity and property investment fund structures.
Benefits of partnerships
There is a greater amount of flexibility in partnerships than when running a company. It’s also easier to raise more capital by bringing more people into the business.
A partnership can be an excellent way of combining different skills and sharing experiences to create a powerful business entity. You don’t have to pay corporation or capital gains tax.
The costs of incorporating a company are avoided and there is less administration due to no requirements to file documents with Companies House (apart from for LLPs and SLPs).
Partnerships (apart from LLPs and SLPs in some circumstances - eg where all general partners are limited companies) also do not have to publish or audit their accounts which means that financial and other information can be kept private.
Disadvantages of partnership
Partnerships (apart from LLPs and the Scottish partnerships) are not separate from the partners (ie are not considered a legal body in their own right) and as such have no independent legal existence distinct from the partners. As a result, partnerships will automatically come to an end upon the resignation or death of one of the partners, unless a Partnership agreement is in place providing an alternative.
Due to most partnerships not being separate from the partners, you and your partners are personally responsible if the business makes a loss (apart from limited partners and in the case of LLPs and SLPs) and for any debts incurred. While Scottish general partnerships have separate legal personalities from the partners, the partners have unlimited liability to creditors for all the partnerships’ debts.
Your share of profit is also taxed as income.
Any dispute which arises in a partnership can cause major problems to the effective running of a business or when it comes to ending the business.
