Every newly-formed organisation that plans to make a profit must choose an appropriate legal structure for itself. The three most common structures are:
- Sole trader
- Limited company
In this blog we’ll talk specifically about partnerships, providing a definition of them as well as an overview of the three different types of business partnerships you can establish.
Before we get into that though, it’s worth noting that you don’t necessarily have to sign a written contract to enter into a business partnership – a verbal agreement between both or all partners can be enough to establish one.
The Definition of ‘Partnership’ in a Business Context
The Partnership Act 1890 defines a business partnership as “the relation which subsists between persons carrying on a business in common with a view of profit.”
The minimum number of members required for a business partnership has always been two. In 2002, the Act was amended to specify that there is no maximum number of members a partnership can have.
Additionally, a partner doesn’t necessarily have to be an individual person – a limited company that invests in the business can be a partner.
The Three Types of Business Partnership and How They Differ
In an ordinary business partnership – unless there is a written agreement to the contrary – every partner is entitled to an equal share of any profits made by the business – whether there are two partners or 22.
Each partner must pay their own tax on their share of the profits.
All partners are equally responsible for the business, and are all personally liable for the repayment of any debts accumulated by the business.
In a limited partnership, there can be two types of partners: ‘general’ and ‘limited’.
In this scenario, it is general partners who are responsible for the management of the business.
With regards to debts, general partners are personally liable for any debts accumulated by the business (just as in an ordinary partnership). Limited partners, however, are only liable up to the amount of money they initially invested in the business.
Limited Liability Partnership (LLP)
Profit Sharing is equal unless there is a written agreement between the partners (known as ‘members’) providing otherwise.
Tax treatment is the same as that in an ordinary partnership.
Partners in LLPs are not personally responsible for the repayment of business debts – each partner is, however, liable up to the amount they individually invested in the business.
Plainspoken Advice on Business Legal Structure
We can help you choose the right legal structure for your business. Contact our Corporate Law solicitors today to arrange a meeting, where we’ll explain everything in plain English and advise you on the best course of action to take.
Give us a call on 0161 969 3131, email us at firstname.lastname@example.org, or simply fill in the green contact form just below.