Partnerships – how they work

If two or more people want to establish a business arrangement between them, they can choose to do so by creating a partnership rather than setting up a company.

The legislation governing the establishment of partnerships is the Partnership Act 1890. Section 1 of the Act defines a partnership as ‘the relation that subsists between persons carrying on a business in common with a view of profit’.

If the partners don’t have a formal partnership agreement in place, then they are deemed to be in what’s referred to as a ‘partnership at will’ which is governed by the Partnership Act, which means that:

• Partners will share equally in the profits, no matter how much time they spend on the business or the capital they have invested into it
• Partners cannot retire or leave the business without it being dissolved
• If the partners wish to expel a partner, or a partner dies or is made bankrupt, then dissolution can occur automatically.

However, many partnerships prefer to protect their interests by having an agreement in place as to how the liabilities, ownership and profits from the business are to be apportioned, and a clear understanding as to what will happen if one partner wishes to leave. These points are enshrined in a Partnership Agreement which will typically include:

• The names of the partners, the name of the business and what the business activities are
• The date of commencement and how long it will last (if it’s not intended to be a permanent arrangement)
• The amount of capital contributed by each partner
• Arrangements for sharing profits and losses
• How the business is to be run, including the responsibilities of the partners
• Arrangements for introducing new partners, and the procedure to be followed if a partner dies, becomes incapacitated or wants to retire from the business.

Advantages

A partnership is generally easy to form, manage and run. One of the major advantages is the lack of formality in setting it up. They are less strictly regulated than companies, in terms of the laws governing their formation. Partners share the responsibility of the running of the business.

Disadvantages

Partners do not have a separate legal identity from their business so can find themselves personally liable for any debts and losses incurred. However, this can be overcome by setting up a limited liability partnership () which offers more protection to individual partners, as it limits liability to the amount each partner has invested in the business.

Problems and disputes can occur if one partner wants to leave and the other partners aren’t in a position to purchase the out-going partner’s share of the business. Again, having a partnership agreement in place will provide a framework to resolve these issues should they arise.

How to choose the right business structure

Of all the choices you make when starting out in business, one of the most important is to choose the right legal structure. It’s important to get good advice; your solicitor will be able to help you weigh up the pros and cons. Not only does this decision have an impact on the amount of tax you will pay, it also affects the amount of paperwork involved and the personal financial liability you could face. Make informed decisions at this crucial time by making sure that you get advice from an expert with experience in this area of law. Mary Kilner has considerable experience in advising companies of all shapes and sizes and has worked in City firms and in-house so you know that you’ll be in safe hands if you seek her advice.

If you need help and advice setting up your business partnership please contact Mary Kilner on 01628 631051 or email mary.kilner@colemans.co.uk

Categorised in: Company and Commercial Law, Latest news

This post was written by Colemans Solicitors LLP