Choosing Between a Partnership and an LLP

Do you intend to start a partnership with at least one other person? Perhaps you want to form a partnership rather than a company, but you are unsure what type to form. This article will explain the two key types of partnerships — a general partnership and a limited liability partnership (LLP) and what the advantages and disadvantages of each are. 

Overview 

Partnerships generally refer to business structures where two or more people work together to share in the profits and losses. 

Before considering how general partnerships and LLPs are different, it is worth understanding what they have in common.

Partnership Agreements

Partnership agreements govern both general partnerships and LLPs. If your partnership does not have a partnership agreement, the law will imply certain terms into your partnership. 

Therefore, all partnerships should have partnership agreement that all parties draft and agree to together. This will minimise any chance for future disputes. 

One of the great benefits of both general partnerships and LLPs is that the law permits the partnership agreement to be quite varied. Partnerships are much more flexible because they do not have to adhere to company law. Short of a few exceptions, your partnership agreement can get quite detailed. 

Matters to Address in a Partnership Agreement

In general, partnership agreements for both general and LLPs may specify:

• the name of the partnership;
• how much money each partner will put into the business and what percentage of the profits they can receive;
• how much, if any, salary partners are entitled to receive and how the partners must account for this;
• what interest rate partners will be entitled to claim from the partnership for advancing the partnership money;
• the amount of work each partner will be expected to contribute; and
• decision-making processes, such as what decisions need to be made collectively and which can be delegated.

Distinguishing Between General Partnerships and LLPs

One of the easiest ways to distinguish between general partnerships and LLPs is that general partnerships come about automatically. In contrast, you and your partners must undertake certain formal steps when creating an LLP. 

Therefore, we will consider the advantages and disadvantages of general partnerships before considering LLPs. 

General Partnerships

General partnerships, also known as unincorporated partnerships, come about automatically when the partners agree they will run a business together and start trading. 

If there was later a dispute, the law would likely determine that this did not constitute an agreement to enter into a partnership. 

Running a General Partnership

General partnerships do not exist separately from the partners. A partnership does not have a legal personality and can not do things like entering into contracts and owning property. 

Instead, partners are generally responsible for the other partners’ debts arising during the partnership’s business. 

This is the effect of an unincorporated business structure and is one of the most significant disadvantages of operating a general partnership. If one of your partners accidentally injures another person in the course of business or causes a client considerable financial loss, you can be held liable for their debts. Moreover, this liability is unlimited, which means that if the partnership does not have enough money to cover the debts, your personal assets could be on the line. 

Fiduciary Relationships 

Fortunately, the law imposes a special relationship between partners, called a fiduciary duty. This reflects the fact that there must be the utmost good faith between partners when dealing with one another. 

The advantage to general partnerships is that they happen automatically and with little fuss. You do not have to file any paperwork, though you should obtain advice on drafting a well-written partnership agreement. 

The disadvantage is that you are liable for your partners’ actions. 

LLPs

If general partnerships are easy to create but lack the benefit of limited liability, LLPs are the opposite. 

Creating an LLP 

Because LLPs benefit from limited liability (see below), its “members” (i.e., what the law refers to as the partners) have more hoops to jump through to create and administer the LLP. 

You must register your LLP with Companies House by sending a few forms off, though you do not need to make the partnership agreement public (which makes this one of the key benefits over limited companies). 

Running an LLP

You will not be liable for the partnership’s debts because it will be its own legal personality. It can enter into contracts and own property. 

As a result, LLP partners must meet a higher standard. Two examples include 

• ensuring the partnership has sufficient funds to settle any debt; and
• filing annual reports.

Compared to companies, which are the other main incorporated business structure, there is still far more flexibility, like not having to maintain share capital. However, it is still more arduous than a general partnership’s administration requirements. 

Key Takeaways

General partnerships and limited liability partnerships (LLPs) have much in common. They both are governed by agreements between the partners, which gives the partners a great degree of flexibility over how they can run their business. General partnerships come about automatically if two or more partners run a business in common, whereas you must incorporate LLPs through a formal process. General partnerships do not benefit from the principle of limited liability, which means you can be held liable for your partners’ actions. LLPs are their own legal person, which means that the partners are not liable for the partnership’s actions. The requirements on the partners under an LLP are higher. 

If you need help navigating a partnership dispute, our experienced corporate 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 at 0808 196 8584 or visit our membership page.

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