A partnership is automatically created when two or more people set up a business together with a view to making a profit. The terms of a partnership are established by the 1890 Partnership Act, although crucially the terms can be amended by drawing up a separate partnership agreement, to regulate the partnership. This is strongly recommended as partnership disputes are common and a clearly drafted partnership agreement can sometimes avoid disputes, but even if a partnership dispute cannot be avoided, costs may be saved if there is a clear agreement in place.
There are now 2 basic types of partnerships, with completely different legal status. These can be classified into general partnerships where the partners remain jointly and individually liable or Limited Liability Partnerships( LLP) created by the Limited Liability Partnership Act 2000. LLPs are essentially a half way house between a partnership and a company, and the LLP is a separate legal entity from the partners, although the partners are taxed as individuals as in a partnership. As with partnerships, LLPs should have partnership agreements to control the relationships between the members.
One of the potential disadvantages of creating an LLP is that it needs to be formally incorporated at Companies House and accounts filed and the LLP’s financial position is therefore available publicly.
Our team of expert partnership law specialist solicitors and lawyers can advise you on partnership issues generally, partnership disputes, creating or converting to LLP status and drafting partnership agreements. Please telephone us for an initial free consultation or complete our partnership law enquiry form for further advice and assistance.
Converting from a general partnership to an LLP
The key areas to consider when converting from an existing general partnership to an LLP are:
•Will all partners in the partners transfer to the LLP?
•Will there be different classes of members (full, salaried, fixed share)?
•What will be the capital put into the LLP?
•Will all partnership property assets transfer to the LLP and how are current liabilities to be dealt with?
•What terms need to go into the new partnership agreement?
Removal of Partners
With both LLP’s and general partnerships which do not have a partnership agreement a partner cannot be removed, and the ultimate outcome of any dispute would have to be dissolving the partnership, which has significant implications (please see below). This is one reason (among many) why all partnerships should have a partnership agreement.
Tax Issues/ advantages over creating a Limited company
Optimising and minimising tax is important for all businesses. One of the advantages of partnership, whether is that partners (or members of an LLP) are treated as self employed (Schedule D) by HM Revenue & Customs and pay tax once unlike in a limited company where profits are taxed for Corporation Tax and then directors are paid as employees and under PAYE the profits are taxed a second time. Shareholders who are also directors can take dividends instead of salary but these are still taxed. Conversion from a general partnership to an LLP is usually tax neutral.
