Partnerships

What is a partnership?

A partnership is where individuals and companies join together to carry out business intended to make a profit. They each have a share in profits, losses and responsibilities for the business. This is typically drawn up in a 'partnership agreement'.

Each partner is taxed on their share of the profits. The partnership itself is not taxed, the partners will have to file separate tax returns.

A partnership is not a company therefore not its own legal entity. This means the partners will be personally liable for its losses.

What are the types of partnerships?

The 3 most common types of partnerships are:

• ordinary partnerships
• limited partnerships
• limited liability partnerships

The ordinary partnership is the most common. Each individual will have certain responsilities to one another, acording to the Partnership Act 1890 :

• partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives;
• every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property name or business connexion;
• if a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.

The limited partnership (LP) is where there is at least one 'general' partner and one 'limited' partner. A limited partner's (or silent partner's) responsibilities are different in that they:

• contribute capital to the business when it's setup
• are only liable up to the capital they invested
• can't manage the business or remove their original investment

The general partner:

• is liable for the remaining debts of the business
• can control and manage day-to-day business activity
• make binding decisions

The limited liability partnership (LLP) is basically a mix of an ordinary partnership and a company, unlike the other forms of partnerships, is its own legal entity. Here, each partner pays tax as if there were in an ordinary partnership but they are not personally liable for any losses the business encounters, as with a limited company.

In a LLP the partners or 'members' consists of two types, ordinary and designated. There must always be at least two designated members and any number of ordinary members. They each must carry out their responsibilities towards to LLP through the LLP agreement but the designated members will have more, these include:

• registering the business with HMRC for self assessment
• registering for VAT if they expect the business turnover to go above the threshold of £85,000
• keeping accounting records
• hiring an auditor (if necessary)
• sending annual accounts and a confirmation to Companies House each year
• informing Companies House of any changes to the LLP e.g. change in members
• acting for the LLP if it's wound up and dissolved
  

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