What is a partnership?
A partnership is established whenever two or more people set up in business together with the intention of sharing profits and losses and do not form either a limited company or a Limited Liability Partnership (LLP).
Even if they do not intend to form a partnership, if they enter into this type of relationship a partnership is formed.
They are governed by the Partnership Act 1890 unless they adopt a Partnership Agreement or Deed.
Disadvantages of the Partnership Act 1890
Partnerships formed under the Act are often unwieldy and can lead to disputes between partners. For instance, under the default provisions of the Act:
- A partner is not obligated to participate in the running of the business in any way, which means that they do not have to turn up to work.
- Partners receive an equal share of the profits of the business, no matter how much time of effort they have put into it.
- Partners cannot retire. If a partner dies or decides to leave the partnership, the partnership must be dissolved, assets distributed equally, and then a new partnership (or other business) created. The process is by no means simple, and can be extremely costly.
- Partners cannot be expelled from a partnership.
Advantages of a Partnership Agreement or Deed
However, many of these potential stumbling blocks can be removed by entering into a Partnership Agreement or Deed.
An arrangement of this kind lets the partners specify the exact nature of their entitlements and obligations, and can go a long way to helping to ensure that the business runs smoothly in the future.
Unlike an LLP or a limited company, a partnership is not treated as a separate legal entity, which means that each partner is jointly liable for any debts of the partnership and is jointly and severally liable for loss or damage arising from wrongful acts or omissions of any partner.
It has, however, the advantage that the partners will be taxed more favourably, as they are regarded as self-employed rather than as employees.
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