Questions:

Answers:

  • Do I need a partnership agreement?
    Yes, all partnerships need a partnership agreement. Partnership agreements are sometimes called partnership deeds. Without a partnership agreement it is impossible to expel partners, to force partners to actually come to work or to otherwise control the distribution of profits. We advise that all partnerships have a partnership agreement.

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  • Do I need an LLP agreement?
    As with partnership agreements these are important. If you do not have an LLP agreement then it is not possible for instance to divide the share of capital and profits other than equally, or to expel a member who is not performing. Given this all LLPs should have a partnership agreement.

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  • Do I need to file a copy of an LLP Partnership Agreement with Companies House?

    No  The position for an LLP is the same as that of a General Partnership and Limited Partnership in that the Partnership Agreement is in effect a private document.  A Limited Company has to file its constitution and changes with Companies House, although a Shareholder Agreement regulating other aspects could be made as a private document.

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  • How does a partnership employ staff?
    Limited Liability Partnerships (LLPs) and Limited Partnerships can employ staff directly as they are corporate bodies. General partnerships cannot employ staff as they are not legal bodies. Nonetheless the partners for the time being can employ staff and this is the usual way. Please contact Ralli for details on this. Our partnership team can advise on this and our specialist employment team can also advise on partnerships employing staff.

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  • Is it correct that Employment Tribunals have jurisdiction to deal with disputes between partners?

    Yes, in two possible scenarios:

    A salaried partner, a “limited equity” partner and a “fixed share member” of an LLP may well be treated as an employee and so could have full employment rights.

    A full equity partner of a partnership and a full equity member of an LLP is deemed to be a “worker” for the purpose of discrimination legislation and therefore has access to a Tribunal in cases of age, race and sex discrimination claims.

    Consult our guide on partnership disputes for additional information.

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  • What issues arise if I change my limited company into an LLP?
    If you are a director of a limited company you are an employee of the company and pay Schedule E income tax. As a member of an LLP you are self employed and pay Schedule D income tax. If the business transfer over, this becomes a TUPE (Transfer of Undertakings Protection of Employnment) issue. It is safer for the directors to have compromise agreements restricting their potential claims against the company.

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  • Can a company be a partner?
    Yes, a company can be a partner. A partnership agreement will be beneficial to protect the company’s interests.

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  • Do I need an Injunction?
    Our solicitors at Ralli Partnership Law have extensive experience of obtaining injunctions.  These are used in cases where you need to stop someone doing something in a hurry.  An injunction is expensive to obtain but is a very powerfool tool as, in theory, if a party breaches an injunction they can in theory end up in prison. These may be used, for example, to stop a partner walking out and taking client or customer lists with him or her. If you are in an emergency situation like this, please call us for more advice.

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  • How can continuing partners protect their position when a partner retires?

    You can build into the partnership deed an option to dissolve rather than buying out and indemnifying a retiring partner.

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  • How can I limit my liability as a partner?
    In general partnerships a partner’s liability is joint and several. That means that he or she is liable individually for all the debts and liabilities of the firm irrespective of their share of the partnership. In this case it is normal for partners to give indemnities to each other so that if a creditor pursues one partner, he or she can then claim their share back from the other partners. It is usual for salaried or fixed equity partners to have indemnities from all the equity owning partners in the firm to protect them. The easiest way to limit your liability as a partner is to incorporate your partnership into a Limited Liability Partnership (LLP) where, as the name implies, your liability will be limited.

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  • How do I admit new partners?
    This depends on the type of partnership that you have.  If you have a partnership agreement or partnership deed (which is recommended for all partnerships) then you need to agree how much if any capital the new partner will put in and what share of the drawings they are entitled to.  You then need to get them to sign up to a partnership agreement or deed. In the case of an LLP it is a similar process, although forms need to be submitted to Companies House to note the new members, and the LLP agreement will need to be changed or the new member will need to sign into the LLP agreement.

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  • How do I expel a partner?
    If you have a general partnership under the Partnership Act 1890 and you do not have a partnership agreement or partnership deed, you cannot expel a partner. This is one reason why all partnerships should have a partnership deed or agreement. In this scenario you will need to dissolve the partnership and reform. Ralli can help you around the complexities of this. Limited Partnerships and Limited Liability Partnership (LLPs) are similar and Ralli recommends that partnership agreements should be in place to regulate the conduct of the partners or members. Under the Limited Liability Partnership Act 2000 it is impossible to expel members without an express agreement. In this case it would be necessary to go to court to get an order.

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  • How is retirement dealt with in a General Partnership?

    A partner will usually be entitled to undrawn profits and balance of capital account and an indemnity from continuing partners e.g. in relation to bank overdraft, lease, rents, etc, when retiring from a partnership.

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  • How is retirement dealt with in an LLP?
    An LLP agreement will usually provide that a member wishing to leave gives e.g. 6 or 12 months’ notice.  He or she then has the right to receive undrawn profits and the credit balance on his/her capital account. This can destabilise the LLP, but to avoid this you can have a repayment by instalments e.g. 10 years.

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  • Is it possible for an LLP to have different classes of member?

    As with a General Partnership or Limited Company it may be possible for an LLP Partnership Agreement to regulate the internal relations of those involved including their member rights.

    However there will be certain statutory provisions and rights of third parties which are unaffected.

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  • My partner has been charged with a criminal offence. Can I dissolve the partnership?
    The trouble here is that if he or she has been charged, but not convicted, they may not be caught by the ambit of any partnership agreement which would usually require expulsion if a partner is convicted of a criminal offence. This is one scenario (and very rare) where no partnership agreement may be advantageous as if there is no agreement one partner can call for the dissolution of the partnership. Do remember that the partners remain jointly and severally liable for the acts of partners before the date of partnership dissolution. Where there is a partnership agreement it may be possible to expel the partner concerned if there is a clause which allows expulsion for bringing the firm into disrepute, as being charged with an offence may be sufficient for that. This is not straightforward and one of our partnership lawyers can advise you on this.

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  • Partners have come and gone – is my partnership agreement still valid?
    Where there is a partnership agreement, the agreement should allow for the partnership to continue despite one or more of the original partners leaving or being expelled.  There must of course be at least two partners at any one time.  It is always best to agree a deed of retirement setting out the terms of the retirement and agreeing any restrictions, payment terms etc. Any incoming partners should sign a deed of accession showing that they agree to and are bound by the original partnership agreement.  However, even if they do not sign an agreement, if it can be shown that they knew about the agreement and acted in accordance with it, then they will be bound in any event.  At Ralli we have experience of dealing with this situation and can advise in more detail if required.

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  • What happens if the Partnership Agreement includes involuntary retirement or expulsion provisions and I am removed against my will. What are my rights?
    If the Partnership Agreement is well drafted and the manner in which you can be required to leave and for determination of your entitlement and payment are clear you can enforce the Partnership Agreement and your rights on cessation on a contract basis. In the case of an LLP, as with a Limited Company, you can also apply to court for an order on the basis the LLP affairs have been conducted in an unfairly prejudicial manner to the interests of members (including you) and the court may decide that a cessation made in accordance with the Partnership Agreement amounts to unfairly prejudicial conduct. The court has a variety of orders it can choose to make which may impact on whether you are reinstated or, failing that, on your entitlement and cessation provisions. You may also be able to apply to court to wind up the Partnership or LLP.

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  • What happens in respect of Partnership debts when I die or leave?

    In the case of a Partnership the rights of third parties against you and continuing partners for partnership or personal debts are unaffected by your cessation, although it would be normal to provide in the Partnership Agreement for indemnities for partnership debts prior to cessation and for notification to creditors and other third parties as to your cessation. In the case of a Partnership which has your name in the partnership name or has your name on letterheads etc this is particularly important as you could be “held out” as a partner post cessation.

    For an LLP or Limited Company provided you have not lost the benefit of limited liability status and the LLP or Limited Company is not insolvent the only issue may be to require a release of any personal guarantee or other personal security existing and/or take indemnities.

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  • What happens to my share or interest if I die or leave?

    If you decide to leave your share or interest by your will to a beneficiary or you die intestate and your share or interest is part of your estate or you reach an agreement with a third party to acquire your share or interest this is not binding on the Partnership or LLP.

    It would be normal to provide in the Partnership Agreement for the share or interest of an outgoing partner or member to be calculated on the basis set out and for payment to you or personal representatives.  In the case of an LLP all payments in respect of an outgoing member are by the LLP rather than continuing members although the outgoing member or his personal representatives may have the benefit of indemnities from those continuing.

    In the case of a Limited Company the constitution may provide a pre-emption right procedure for your shares to be offered to other members or you may have entered into a cross option or similar arrangement which applies to your shares if you die or leave before your personal representatives or another third party can become the legal owner and registered in place.

    Having a Partnership Agreement in place will stop such problems arising.

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  • What happens when a partners retires or leaves?
    Under a general partnership a partner cannot retire or leave. The partnership has to be dissolved. The remaining partners can then reform the partnership, but there are negative tax implications to this. If there is a partnership agreement (or if you have formed an LLP) then it is possible for the partnership to continue. Agreements need to be reached as to limiting the partner’s liability to the time that he or she was in partnership. Notices are placed in local papers and in the London Gazette to cover this point.

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  • What is a Designated Member of an LLP?

    A designated member is a member of an LLP who either on incorporation or at a later date has agreed to be a designated member.  Designated members perform statutory functions such as filing partnership accounts with Companies House.  In some Partnership Agreements where there are a small number of members it is not uncommon for all members to be designated members.

    In the Partnership Agreement it is important to set out the decision making process on matters which impact on the LLP and provide for decisions by designated members, by members or even by different classes of member. It is possible to draft an agreement so that the designated members are treated as being equivalent to directors of a Limited Company for management purposes and that only certain key decisions must be referred to members generally.

    Changes in designated members or members or details must be filed with Companies House.

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  • What is a fixed equity partner?
    Equity within the partners is equal unless otherwise specified. It is possible to specify different shares to different partners. A fixed equity partner has a fixed share of the equity and is entitled only to a fixture of the profit. This is not dissimilar to a salaried partner, but has tax advantages – a salaried partner is usually Schedule E, i.e. employed – whereas a fixed equity partner is Schedule D, i.e. self employed.

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  • What is a salaried partner? How does it differ form a Fixed Equity Partner?
    Unless otherwise specified in a partnership agreement, all partners are equal. It is possible to vary the distribution between different partners. It is also possible to appoint salaried partners. These are people who have the title partner but are still employed. In this case it is necessary for the salaried partners to receive an indemnity from the partners who own the equity in the firm as they will remain jointly and severally liable for the liabilities of the whole firm as they are holding themselves out as partners in the firm.They differ from Fixed Equity Partners who are similar to salaried partners but have a fixed share of the equity.The advantage of being a fixed equity partner is that your are taxed in Schedule D, self employed, which is normally more tax efficient than Schedule E, employed, which would apply to a salaried partner.Within an LLP, all members are treated the same so far as the outside world is concerned, but is is possible to have different classes of members, so that some members can be paid a fixed amount of drawings, thereby creating members who look like salaried partners.

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  • What is the difference between a partner and a member?
    Partner is the term used to denote partners in General Partnerships.  It is also used in reference to Limited Partnerships, although the term Limited Partner is also specifically used.Member is used to demote a member of an LLP.  LLPs must also have at least two Designated Members. You should be careful if you are a member of an LLP and call yourself a partner. This is common in accountancy and legal practices.  The risk is that you are holding yourself out as a partner in a General Partnership rather than as a member of an LLP and are therefore undermining your limited liability protection.  There is no case law on this yet.

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  • Can a Partnership or LLP be wound up?

    Yes. An application can be made to court. This may be considered a “last resort” option if the Partnership Agreement does not resolve the cessation and entitlement.

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  • How do I contract with a partnership?
    This depends on the type of partnership. A Limited Liability Partnership (LLP), and a Limited Partnership are both corporate bodies and it is possible to contract with them in the same way that anyone can contract with a limited company. A general partnership is not a separate legal entity and in theory you should contract with the individual partners at the time of your contracting. It may be possible to contract with the partners for the time being. There are issues when partners retire and new partners are admitted as to who is liable at which point. At Ralli we can draft contracts for you to contract with partnerships.

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  • Should I form a Partnership, an LLP or a Limited Company?
    If two or more of you set up in business together you automatically form a partnership.  In order to form a Limited Liability Partnership (LLP) you need to register the LLP with Companies House.  Similarly to set up a limited company you need to register with Companies House.  Ralli can help you do either of these things.There are pros and cons to each form of business. The main difference between a partnership and a company is that a partnership does not have a separate legal personality; that is the partnership does not exist as a separate entity in law, whereas a limited company does exist in law.  The other main difference is that a limited company, as the name implies, has limited liability; if the company ceases to trade the owners and directors are not directly liable for any losses unless there has been fraudulent activity or other wrongdoing. A limited company is taxed as a company and its directors are employees who can be paid either a salary, which is taxable or can take out dividends if they are also shareholders, which can be more tax effective. The individual partners in a partnership are taxed individually on their share of the profit of the partnership.  The partners do not have to declare their income or turnover openly unlike in a limited company. A Limited Liability Partnership (LLP) is a half way house. The LLP has legal personality, i.e. it exists and can form contracts; it needs to disclose accounts at Companies House, but the members, like partners, are still taxed as individuals.Certain professions, such as Lawyers and Accountants have historically had to act as partnerships or LLPs.  In most situations if you are not a professional and you are looking to trade then a limited company is the most sensible way of going forward.

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  • What happens if the number of partners or members falls below two?

    For a General Partnership if the number of partners falls below two the Partnership dissolves, although it may be possible for the Partnership Agreement to provide for the remaining person to buy the other out and continue as a sole trader. For an LLP, if the number of members falls below two that does not operate to determine the LLP but if the situation persists for six months or more, limited liability protection is lost and there may be grounds for a winding up.  A Limited Company which is a private company can be formed as or become a single member company.

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  • What if I want to invest in a Partnership or LLP but not be involved in the management of the firm?

    A Partnership makes no distinction. You are either a partner or not and all partners have a right to be involved in management.  If you choose not to exercise that right it may be grounds for your removal; third party rights against the Partnership and its partners are unaffected.

    For a Limited Partnership you could agree to become a limited partner.  However if you do take any managerial action or responsibility the benefit of limited partner status is lost.

    For an LLP it is possible to provide in the Partnership Agreement for different classes of member and rights but an LLP may lack the flexibility of a Limited Company particularly if the investor wants to realise the investment by forcing a buy out or selling to a third party.

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  • What is a partnership?
    A partnership occurs automatically whenever two or more people set up in business together with a view to making a profit.  A partnership occurs whether or not you want one to occur. The very act of the two of you setting up in business together forms a partnership. Partnerships are covered by the 1890 Partnership Act unless you draw up a separate partnership agreement, or partnership deed, to regulate the partnership.

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  • What is an LLP?
    An LLP or Limited Liability Partnership is a specific partnership formed under the Limited Liability Partnership Act 2000.  It is in a way a half way house between a partnership and a company. It provides the members (which is what the partners are called) with limited liability. The LLP is a person at law and can employ staff and enter into contracts unlike a partnership.  However, the members are taxed as individuals as in a partnership.

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  • What is Limited Partnership?
    A Limited Partnership is a specific form of partnership set out in the Limited Partnership Act 1907. Within a Limited Partnership there are two types of partners called General Partners and Limited Partners. There must be at least one General Partner. Limited Partners can contribute capital money to the partnership but are not liable for the debts or obligations of the firm over and above the amount they have contributed.  It is possible for a limited company to be a limited partner. A limited partner may not take any part in the management of the firm at all nor can they can take out their capital.  Limited partnerships are often useful in joint ventures.

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  • What name can I give my partnership?
    A partnership can have any name it likes so long as it does not impinge on any trade marks or attempt to parcel off on any other names. LLPs and Limited Partnerships have to register at Companies House and the Registrar of Companies has a set of limitations as to what names can and cannot be used. Ralli can advise you on this.

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  • What are the forthcoming changes in solicitors partnerships?

    Under the Legal Services Act 2007 the Solicitors’ Regulation Authority will, provided the regulations have been approved by the Ministry of Justice, permit legal partnership and LLPs to have non-lawyers participating in investment and management from April 2009. A non-lawyer participation must not be more than 25% of the equity whether it is a partnership, an LLP or a company.

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  • What does the expression de-equitisation mean and is it lawful?
    This is a practice used by city firms to take away from a partner his/her equity status.  Yes, it is lawful, provided the partnership deed says so.  Contract law applies. But discrimination law also applies – so it has to be done carefully. If it is not permitted under the Partnership Deed then its implementation could amount to a compulsory retirement and could give grounds for a dissolution and possibly a discrimination claim.

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  • How do Partnerships and LLPs differ in the disclosure of their financial details?

    Partnerships do not have to file accounts. LLPs do and they have to show details drawings and the highest remuneration of a member and the annual return will show the members’ places of residence.

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  • How does a partnership own property?
    A Limited Liability Partnership (LLP) or Limited Partnership can own partnership property in the same way as any individual or company. A general partnership cannot own property and the partners have to own the property in their own names. In law only a maximum of four partners can own property. It is therefore necessary to set up a deed of trust for the partners for the time being.It is often the case in professional partnerships that some of the partners may own the property which is then rented to the firm. This property can also be put into a SIPP (Self Invested Pension Plan), which provides great tax advantages to the partners.

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  • Is an LLP good from a tax point of view?

    Tax payable by the members of an LLP is the same as personal tax so the band of tax rates runs from 20% to 40%.  Corporation Tax is 21% to 28%.

    For a general trading entity a limited company has tax advantages; but for a single venture entity the LLP is better because on cessation it is not liable to double taxation.  A limited company will pay corporation tax on the capital gain and the shareholders will then pay income tax on the distribution of cash in the same way as they would on a dividend. Read our guide for further information on partnership tax and common issues.

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  • What happens if a Partner or the LLP is insolvent when I die or leave?

    If you receive payment for your share or interest in the Partnership from a partner who is insolvent then the payment in cash or non-cash assets from that person could be set aside. Your rights against that partner or the other partners to be paid your entitlement in cash or non-cash assets will continue but you will rank as an unsecured creditor.

    In the case of an LLP the normal position is that, like a Limited Company, the LLP is responsible for its own debts and your liability as a member is limited.  However as with a Limited Company it is open to an administrator or liquidator of an insolvent LLP to apply to court for an order against one or more members (or former members) to contribute to assets available to meet creditors claims if it can be shown that there has been fraudulent or wrongful trading within the meaning of Section 213 or 214 Insolvency Act 1986.

    Furthermore there are “clawback” provisions in Section 214A Insolvency Act 1986 applicable only to LLP’s which provide that any payments or transfers made by an insolvent LLP whether in connection with your cessation or in a prior period can be recovered. It may be appropriate to include indemnity wording in the Partnership Agreement from the continuing members rather than rely on your rights against the LLP as an unsecured creditor.

    It is open to an administrator or liquidator of an insolvent LLP or Limited Company to apply to court for an order that any transaction which amounts to a preference ahead of other creditors or constitutes a transaction at an undervalue be set aside.

    It would not normally apply to a cessation but irrespective of whether or not the LLP or Limited Company is insolvent any creditor can apply to court for a transaction to be set aside if it can be shown the transaction was entered into to put assets beyond the reach of creditors.

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  • What happens if a partnership goes bust?
    A general partnership under the 1890 Partnership Act cannot go bust in itself. If any of the partners becomes bankrupt this is an act that will dissolve the partnership. Where a partnership agreement is in place, a well drafted partnership agreement will have bankruptcy as a cause for the removal of a partner. Limited partnerships under the 1907 Act and Limited Liability Partnerships (LLP) can become insolvent and standard insolvency law applies. Contact Ralli for details on this.

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  • What is a lockstep?

    Lockstep is a practice whereby over a period of time partners acquire a greater profit share and in some cases other partners’ entitlement to profit share deceases.  In some cases lockstep advancement carries with it an obligation to inject more capital.

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  • What is the alternative to lockstep?

    The alternative is performance-based or merit-based reward.

    It is possible to combine lockstep with performance or merit based reward. You could have a lockstep providing for basic drawings with enhancements to cover introduction of work, billing above target, good conduct, exemplary performance, etc.

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