Most areas of law are constantly developing, with new pieces of legislation being adopted on a regular basis. However, partnerships have been governed by the same piece of legislation since 1890, namely, the Partnership Act 1890, which was passed in the United Kingdom. With this in mind, the question arises, are partnerships still a viable business structure for some companies, and if so, what are the advantages and downsides of doing so? In this article, advantages of general partnership, we take a look at the process involved and the options available to you.
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Is there a distinction between a partnership and its partners?
According to the Act, a partnership is defined as “the relationship that exists between persons who engage in the conduct of a business in common with a view to profit.” In a partnership, the people involved and their interaction with one another are the most important characteristics. An association of partners, as opposed to a limited business, does not have a separate legal identity from its participants; that is, the partnership is not legally distinct from its partners.
To put this into perspective, it means that a partnership cannot be the owner of property or other assets in its own right, nor can it form a security interest in such property or assets. The property and other assets owned by one or more partners in partnership must instead be held by one or more of the partners on the other partners’ behalf. This is an important point to consider if your company is anticipated to get into a large number of commercial contracts or finance arrangements in the near future.
Partners’ liability
The unlimited nature of the partners’ liability is consistent with the fundamental idea that the partnership business and the partners in business are one and the same. If you form an incorporated organisation, such as a limited liability partnership (LLP) or a corporation, you will have a different legal identity from the persons who form the basis of the organisation. If a limited liability partnership (LLP) or a corporation fails for any reason, its creditors should only be able to pursue the assets owned by that unique organisation; they should not be able to pursue the individuals who founded the entity. In the case of a general partnership, the situation is different: if the partnership experiences financial difficulties, its creditors may pursue the individual partners (as well as their personal assets) in order to satisfy the obligations and liabilities of the partnership.
This does not appear to be an ideal situation: you do not want your home to be at risk as a result of a series of unlucky or ill-timed business decisions. When it comes to applying for a business loan, is this any different from the situation in which a director of a private firm provides his or her personal guarantee?
What are the Benefits of a general partnership?
There are significant benefits to forming a partnership. For the most part, partnerships are recognised as transparent entities for tax reasons. That is, because the partnership lacks a separate legal personality, its operations are taxed as if they were the activities of the individual partners, and the partnership is not subject to corporation tax.
Consider the case of two similar businesses. The first is a legally formed corporation, and the second is a legally formed partnership. In the first instance, the firm will pay corporation tax on its trade gains, and then, when the profits are taken out of the company by the individuals involved, whether through director remuneration or shareholder dividends, income tax will be due as well. The profits of the partnership, on the other hand, are only taxed once, when they are distributed to the individual partners.
This is, of course, a gross oversimplification of the situation. A corporation can be structured in a tax-efficient manner, resulting in income that is distributed to shareholders while minimising the amount of tax paid on the distributions. However, to put it another way, the profits of a partnership are only subject to one sort of taxation. Another significant advantage of a partnership is the level of confidentiality that it provides to the individuals involved as well as the business. In contrast to a corporation or a limited liability partnership, a partnership is not required to file statutory accounts or other business-sensitive information with Companies House. It is possible to achieve significant cost and privacy savings by doing so. The partners can pick which aspects of their business information they want to make available to the public (if any).
This lack of visibility can be a major factor in the continued uptake of collaboration opportunities. In many cases, family-run enterprises, particularly those in the agricultural sector, form the basis of these partnerships, and it is quite reasonable that a family firm would prefer to keep its financial situation confidential. It also allows for a great deal of flexibility because there are no formal filing requirements and just a small amount of regulation: partners are free to control the affairs of their firm amongst themselves.
Can anyone draw-up a partnership agreement?
Yes, but it is advisable to proceed with caution: there are hazards involved if a partnership agreement is not clearly defined. Individuals who are forming or joining an existing partnership will be investing in the firm in the form of real assets and/or their time, and they will want to know (or should want to know) how much money they will make on their investment. What will be the distribution of profits? What process will be used to make managerial decisions? What happens if they want to introduce or exclude a new partner from the group? If all of these concerns are worked out at the onset, conflict may be avoided later on, and it can also be identified early on what the issues are that are likely to arise between the parties (if any). Particularly crucial in a business where the responsibility of the individual owners or operators is virtually limitless.
It is quite common for relatives to have disagreements as a result of the absence of a clear and appropriate partnership agreement between them. Parents, for example, frequently make statements regarding the division of a family partnership on which their children rely, and their children rely on this wording. It is possible that costly conflicts will occur upon the death of the parents if these assertions are not represented in an up to date partnership agreement.
Spending a little effort now to draught a sensible partnership agreement will save you hours of work and anguish down the road if there is a disagreement.
How we can help
We have a proven track-record of dealing with general partnership agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a general partnership. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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