Under English law, partnerships are defined under the Partnership Act 1890 as a relationship between persons carrying on a business in common with a view to profit. Persons can include; individuals, companies and limited liability partnerships. As you will appreciate, the definition in the Partnership Act 1890 is extremely wide and often results in partnerships being formed where individuals, companies or limited liability partnerships have not intended there to be such an arrangement. Care must be taken when drafting commercial contracts and dealing with individuals, companies or limited liability partnerships, to ensure that partnerships are not unintentionally formed.
So, why would a partnership be problematic?
Unlike a limited company, a partnership is not a separate lega1.3l entity under English law. Amongst other implications, a partners liability is not limited should anything go wrong with the partnership. This means that the individual partners will be jointly liable for the debts and obligations of the partnership as well as being jointly and severally liable for the wrongful acts or omissions of their fellow partners.
Incorporating a Limited Company or a Limited Liability Partnership (LLP) may offer comfort for individuals concerned with “unlimited liability” as their liability is capped under these trading vehicles. For example, a shareholder’s liability in a company limited by shares is limited to any amount that they have not paid for their shares (it is rare for there to be such an amount) and a member’s liability in an LLP is generally limited to the amount they have contributed to the LLP.
It is not all doom and gloom however; partnerships are simple and cheap to set up. Furthermore, there is no requirement for a general partnership to file accounts or other documents at Companies House and no formal agreement between the Partners is necessary. That being said, it is strongly advisable for the Partners of a General Partnership to enter into a partnership agreement to formalise arrangements between themselves. If no partnership agreement is entered into, the terms of the Partnership Act 1890 will apply in default. Under the Partnership Act 1890, the default position is that every partner has the right to participate equally in the partnership assets and profits. This could be problematic if one partner has contributed more to the partnership than another and obliges a larger share of the profits for doing so.
A partnership agreement will include provisions to clarify some of the issues raised above. For example, a partnership agreement will include provisions that deals with the proportion of profits and losses attributed to each partner and provisions pertaining to any restrictions on what a partner can and cannot do independently; including any restrictions partners are subject to on them leaving the partnership.
General Partnerships are both practical and problematic. For more information on; partnerships in general, partnership agreements, incorporating an LLP or a limited company or ensuring partnerships are not created unintentionally, please contact a member of the corporate and commercial team on 0114 218 4000 or email email@example.com.