When you run a business, or if you are in the process of setting one, it is very important to provide careful consideration on the structure of your business. Partnerships are one such structure that must be explored, because their flexible nature means they can meet a number of settings. This article explores partnerships in more detail, from common features to various types available.
The partnership consists of two or more owners (which can be individuals, limited companies or partnerships) entering business together with general views to generate profits.
These partners, or ‘members’, will share business profits and losses. Factors such as obligations, management and investment will vary depending on the type of partnership adopted. Even so, it can be useful to document the details of your business structure in a partnership agreement to ensure that each member is aware of his position.
The partnership has many advantages, namely that they are much easier to regulate than limited companies, and they are also far more flexible. With less formalities and documents to organize, you can start trading under a relatively fast partnership. However, not all partnerships have legal identity, and so do not benefit from limited responsibilities. That is why you need to think about the type of partnership which is most suitable for your business.
Type of partnership.
There are 3 types of partnerships:
1. General Partnership.
The outline of the general partnership is set in the Partnership Act 1890, where it is described as ‘relationships that survive between people who do the same business as profit views’. This structure remains the same, and seeing each member share the same rights and responsibilities, and a shared responsibility for debt. This can have significant implications, because general partnerships do not have legal identity protection. Therefore the partners do not have limited liabilities, which means their personal assets can be used to repay creditors.
2. Limited partnerships.
Introduced in 1907, limited partnerships consisted of one or more general partners, and one or more limited partners. Even though both of them share business profits, there are real differences between two roles. General partners are responsible for managing and everyday business, placing them with full responsibility (and therefore put their assets at risk if the business has problems). On the other hand, the limited partner only invests money, which means personal responsibility is reduced to the amount they have donated for business.
3. Limited Liability Partnership (LLP).
Limited accountability partnerships emerged in 2000 and can be seen as a half-way home between general partnerships and limited companies. Although there are more documents involved and the application must be submitted to the company’s house, the business will get legal status. This can be very useful, because each partner will have limited obligations, protect their assets if the business faces any debt.
What type of partnership should you choose?
For help decide which type of partnership is the best for your business, talk to legal experts. A lawyer will be able to give you detailed information about each structure, describe the benefits and risks of each. They can then help you complete the Partnership Agreement, along with other legal issues that need to be addressed.