A partnership is formed whenever two or more people set up in business together with a view to share profits and losses and they do not incorporate, either as a limited company or an LLP. A partnership is formed whether they intend to form a partnership or not.
These inadvertent partnerships are referred to as Partnerships at Will and are governed by the Partnership Act 1890.
Even if the partners intend to form a partnership, all partnerships which are not LLPs or Limited Partnerships are General Partnerships and regulated by the Partnership Act 1890. If any of this information leaves you feeling uncertain about your position, you should ask to speak to a partnership solicitor.
What does the Partnership Act mean for you?
The issue with partnerships under the 1890 Partnership Act is that the act is rather vague and sometimes unhelpful to running a business. There are some aspects of the 1890 Act which many of those in a partnership do not realise, for example:
- In the absence of agreement to the contrary, a partner shares equally in the profits of the business irrespective of the amount of time or effort he or she has put into the business.
- A partner cannot retire. If one partner decides to leave or dies, the partnership has to be dissolved, the assets divided up and a new partnership (or other business) formed. This can be time-consuming, complicated, and expensive.
- A partner cannot be expelled; if this is necessary the partnership must be dissolved and reformed, which bears many legal complications.
For these reasons we always recommend that all partners enter into a Partnership Agreement or Deed to regulate these matters and to allow the partnership to continue on the exit of one partner.
A Partnership does not have separate legal form; it does not exist as a separate legal entity, unlike an LLP or limited company. The individual partners are jointly (and severally) liable for all the liabilities of the partnership.
From a tax viewpoint, this can be beneficial to the partners as they are taxed as self employed (Schedule D) rather than employees (Schedule E). Profits are therefore only taxed once, rather than the business paying corporation tax and its directors incurring PAYE tax.
In addition to equity partners who own a share of the capital of the partnership, there can be salaried partners (Schedule E) who are partners but are paid a salary. We would normally recommend that salaried partners obtain an indemnity from the equity partners as they can take on joint and several liability but do not share in the profits of the firm. Alternatively there are fixed equity partners (Schedule D) who take a fixed share of the profits in cash terms.
Important considerations for partnerships
The Partnership Act 1890 defines who can be a partner as: “persons carrying on a business in common with a view of profit”. This can be established by an oral contract or simply by conduct. It is therefore possible to inadvertently find yourself in a partnership.
However, there are many benefits to establishing a partnership as long as an agreement is drawn up to counteract the restrictions of the 1890 Partnership Act. A good partnership agreement should cover eventualities such as expulsion, retirement, death and misconduct, as well as what is expected of each partner in terms of contributions, duties and attendance. Once these hurdles are dealt with, a partnership is a practical and mutually beneficial business vehicle.
Contact us if you are in need of our expert advice on the Partnership Act 1890, would like help formulating a partnership agreement, or require guidance on any other aspect of partnership law.