Choosing a partnership structure
You and your business partner may have a fantastic business idea and wish to launch your business as soon as possible, but before you do so it is vital that you give adequate thought to what type of partnership will best suit your needs.
Alternatively, you may have been in business for some time and have the opportunity to join forces to create a partnership, or you might have been offered the chance to join another business and are wondering how best to proceed.
‘Whatever situation you are in you will need to give adequate consideration as to what will be appropriate in your circumstances’ explains Dermot Callinan, a specialist in company law at Myers & Co in Stoke-on-Trent. ‘There are three options which each have different levels of risk, liability and accountability.’
An unincorporated partnership
One option is the unincorporated partnership, in which the partners can be either people or companies. You will have to register with HMRC as a partnership and nominate which of you is going to be responsible for accounting to HMRC. The partners share their profits, and each submits their own tax return and pays the tax on their share.
Whilst this option is perhaps the most straightforward, the partners are jointly and severally liable for the debts of the partnership. This means that, unlike a limited liability partnership or company, you have no personal protection in the event that the partnership becomes insolvent.
It is likely to be easier to raise finance for this type of partnership, because potential lenders will look at the personal assets of each of the partners as a factor in determining the risk of lending the funds. Another issue to consider is that disagreements can arise between partners so, despite its relatively informal nature, it is vital that you obtain legal advice to assist you with the construction of a partnership agreement that sets out duties, rights and obligations.
A limited company partnership
A partnership does not have to be between individuals. It is possible for one or more partners to be a limited company. Before you enter into partnership or take on a second person into your business to form a partnership, you may wish to consider whether it would be best to incorporate a limited company before doing so. A private company is limited by shares, so the company has shareholders and the liability to creditors of shareholders is limited to their original investment.
A company director will run the company on behalf of the shareholders. It is possible for you to be the director and sole shareholder, making this a viable option for your half of the partnership. There are advantages to a limited company incorporation: you will have less personal exposure should the partnership fail, and you will also benefit from limited liability protection.
The disadvantages are that there are costs incurred in setting up a limited company, and you will need to submit annual accounts and financial returns which will be publicly available.
You may find it harder to get funding than if you were in an unincorporated partnership, but there are increased protections in the limit of liability should things go wrong.
A limited liability partnership
A limited liability partnership, or LLP, is similar to a limited company in that it protects individual members’ assets. Unlike a limited company there are no shares, shareholders or directors. There can be a flexible number of partners, called ‘members’, but at least two have to be responsible for filing the annual accounts of the LLP (they are called ‘designated members’). This means that you need to have at least two members of an LLP. As with an unincorporated partnership, the members take their share of the profits from the LLP which is taxed as their individual income; so, each member has to be self-employed. LLPs are registered with Companies’ House and the agreement between the members should provide the share that each member receives.
This can be a popular choice for partnerships as it combines the advantages of a partnership with the peace of mind of a limited liability company. Flexibility can be written into the members’ agreement, which means that members can join and leave. The downsides of an LLP structure is that the partners must disclose their income publicly and are required to start trading within 12 months of incorporation, failing which the LLP will be struck off.
Seek expert legal advice
The option that is right for you will depend on the nature of your business, your plans for the future, and your circumstances. Because no two business plans are the same, it is worth seeking advice at an early stage from a specialist lawyer who can advise you on the structure of your partnership and the necessary provisions for your partnership agreement or members’ agreement.
At the outset prospective partners tend to focus on a rosy future together, but a lawyer can identify potential pitfalls and weaknesses in a business plan, provide you with a bespoke partnership agreement tailored to your specific circumstances, and ensure that there are clear provisions in the event that something goes wrong.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.