How to Start a Business Partnership in England and Wales

Starting a new business on your own can be daunting, making it ideal to operate as a partnership. You may be looking to go into business with another person. Perhaps you are entering into a partnership with a friend or family member. Maybe you have been approached to join an existing business as a partner. However, before you commit, it is essential to understand the nature of a business partnership. 

This article will explain the two most common forms of business partnerships in England and Wales: 

1. unincorporated partnerships; 
2. limited liability partnerships.

 We also explore how to create and operate them.

Partnerships vs Limited Liability Partnerships

There are two main kinds of partnerships in the UK: partnerships that are unincorporated (“partnerships”) and limited liability partnerships (LLPs), which are incorporated.  

Partnerships

Partnerships come into being automatically when two or more people carry on business “in common” with the view to making a profit. It is a broad definition. In practice, it is usually apparent when you are working in a partnership. 

Partners in a partnership typically share the profits and losses equally. However, you will have the flexibility to amend and alter these if you create your own partnership agreement.

“Joint and Several Liability” 

Partnerships are unincorporated, meaning that the partnership does not have a separate legal existence. As a result, the partnership cannot own assets or property. Instead, one or more partners will own the asset in their personal capacity and hold it “on trust” for the other partners. An explanation of how “trusts” work in a commercial context can be found here. 

Likewise, the partnership cannot enter into its own contracts.

Therefore, when referring to the “business” of a partnership, the law only recognises the partners themselves. This helps explain why partners are “joint and severally liable” for the debts of the partnership and each of the partners.

Creating a Partnership

Partnerships arise automatically in certain circumstances. But this does not mean you cannot set out the terms of the partnership. In fact, it would be highly prudent to do just this. This is the basis of the partnership agreement, which is a formal declaration of the rights and obligations the partners owe one another. 

If there is no partnership agreement, disputes between partners become more complicated. Notably, the law will imply specific terms from the 1890 Act as if that was the agreement each partner consented to. Invariably, because the act is 130 years old, this can produce some problems (like requiring the consent of every partner to expel a partner, including the partner every other partner wants to get rid of).

The Partnership Agreement

Partnership agreements can be as long or as short as the partners wish. However, you should give thought to the following issues:

• the name of the partnership;
• how much money each partner will be investing into the business;
• how each partner will share in the profit and losses; and 
• how decision-making should work.

You can simply write down the terms of the partnership agreement and have all partners sign the document.

Responsibility of Partners

Subject to your partnership agreement, you generally owe your other partners “the utmost good faith”, which is a high standard. In practice, this means you should be honest about all profits and losses. You should also disclose all relevant information about the business.

The partnership agreement will also set out the full nature of the responsibilities you and your partners owe to one another.

Limited Liability Partnerships (LLPs)

LLPs are a special kind of partnership. LLPs are incorporated, meaning they have their own legal existence. They can enter into their own contracts and hold property in the partnership’s name. The liability of the partners to the partnership is limited, meaning that third parties cannot hold you personally liable for the debts of the partnership, nor are you personally liable for your partners’ actions.

Incorporation is one clear advantage LLPs have over partnerships. However, there are more formalities and responsibilities associated with LLPs.  

Your tax obligation as a partner of an LLP is the same as a partnership.

Creating a Partnership

Because an LLP has its own separate legal existence, you must follow certain formalities to create an LLP.

You must prepare information and send two copies of it to Companies House, including the:

• name of the LLP
• country where the registered office will be;
• address of the registered office;
• name and address of each “member” (i.e. partner) of the LLP; and
• names of the designated “members”.

What Is a Designated Member?

When incorporating the LLP, you must nominate at least two partners to be “designated members”. Not all partners need to be a designated member. However, in practice, all partners tend to declare themselves as designated members. 

Designated members will have the following responsibilities:

• signing and filing the company’s annual accounts with Companies House;

• the ability to appoint auditors;
• the obligation to file confirmation statements and notices of any charges (loans issued to the company); and
• the right to wind the company up and dissolve it.

These responsibilities are quite similar to those of a company director.

The Partnership Agreement

As with partnerships, your LLP will be governed by the rules of the partnership agreement. You should therefore consider the same issues highlighted above.

If you do not create a partnership agreement, the law will imply certain terms as if you had agreed to them. Therefore, it is better to be thorough and upfront and spend an appropriate amount of time thinking about these terms.

Responsibility of Partners

In addition to the duty of utmost good faith, partners in an LLP must also ensure they prepare the business’ financial accounts, which you must send annually to Companies House along with the:

• address of your offices;
• names and addresses of each of the partners;
• identity of “designated members” (see above); and 
• address where the “register of debenture holders” is kept.

You do not have to maintain a certain share capital structure like you do for limited companies.

Which Is Better?

Determining which type of partnership is better for your business depends on the needs of you and your partners. The biggest advantage to LLPs is the effect of incorporation and limited liability. But the disadvantage is the reporting requirements, which partnerships are exempt from. 

Key Takeaways

Business partnerships come in two main forms in England and Wales: unincorporated partnerships and limited liability partnerships (LLPs). Unincorporated partnerships come into existence automatically if you and at least one other person work equally together to make a profit. LLPs must be incorporated by registering it with Companies House. Both are flexible ways to run your business, but LLPs limit the partners’ liabilities for the partnership’s debts.  

If you need help with incorporating as an LLP or drafting a partnership agreement, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions