Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

General partnerships (often referred to as traditional partnerships and colloquially described as firms) are governed by the Partnership Act 1890 (the 1890 Act). The term ‘partnership’ describes the relationship between two or more persons (natural individuals, corporate entities or a mixture of both) ‘carrying on a business in common with a view of profit’ (see section 1(1) PA 1890). Because a general partnership is no more than a collection of individual partners (without separate legal personality), each partner has unlimited liability for the firm’s debts and other obligations.

There is no significant overlap between the law governing general partnerships and UK company law. The rights and obligations of the partners are usually set out in a written partnership agreement but can be agreed orally. In the absence of agreement on certain basic matters (such as how profits are to be shared), the 1890 Act sets out default rules that apply.

Limited partnerships (LPs) are governed by the Limited Partnerships Act 1907 (the 1907 Act). They are similar to general partnerships in most respects, and the Partnership Act 1890 applies to LPs to the extent that the 1907 Act is silent on any matter. However, an LP may designate certain of its partners as limited partners. Limited partners must not be involved in the day-to-day running of the business (such as investors who take a share of the profits but have no management role) but in return are only liable up to the sum of money they have agreed to contribute to the LP as capital. Partners involved in the running of the business are known as ‘general partners’ and they (like all partners in a traditional partnership) have unlimited liability for the LP’s debts and other obligations. The rights and obligations of the partners in an LP can be agreed orally but are almost invariably set out in a written partnership agreement.

Limited liability partnerships (LLPs) are in essence a hybrid between a traditional partnership and a company. They are governed by the Limited Liability Partnerships Act 2000 and the Limited Liability Partnership Regulations 2001 (which set out default rules governing the LLP and its members in the absence of agreement to the contrary) as well as certain provisions of UK company and insolvency law. Although the Companies Act 2006 and Insolvency Act 1986 are not of general application to LLPs, the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 apply certain aspects of company and insolvency law (with certain variations), such as the obligation to file statutory financial statements, restrictions on the use of certain names, trading disclosure requirements and the keeping of a register of ‘persons with significant control’. With certain exceptions, the liability of members of an LLP (referred to hereafter as ‘partners’ save where sought to be differentiated from partners in general partnerships) is limited.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

As described above, English law recognises three different types of partnership:

  • General partnerships, once overwhelmingly the most common vehicle for professional services businesses, such as legal and accountancy firms, until such firms were allowed to practise through the vehicle of LLPs (see below). General partnerships remain popular for smaller trading businesses and it is estimated that they greatly outnumber LLPs (although, given that general partnerships are not registered, it is not possible to know with certainty how many there are). Partnerships are also sometimes used for joint ventures between two or more corporate businesses.
  • LPs, which are less common than general partnerships but have a valuable role in investment fund structures.
  • LLPs, which are commonly used by professional services businesses, as they combine the organisational flexibility and tax transparency of general partnerships with the limited liability that was previously only available through the use of a limited liability company. In addition to their use for professional services businesses, LLPs are commonly used in real estate joint ventures and within the group structures of businesses operating in the financial services sector.

There are a number of reasons partnerships and LLPs are popular among professional services businesses such as legal and accountancy firms. These reasons include historic regulatory restrictions on operating through companies, as well as the freedoms that partnerships and LLPs offer as to internal management arrangements and capital maintenance. Tax transparency (ie, that profits are only taxed in the hands of the partners rather than within the partnership or LLP) has been a key driver for the use of partnerships and LLPs for investment purposes.

Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

A general partnerships is a description of the relationship between a collection of persons who carry on a business together. There is no legal entity separate from the partners comprising the firm from time to time.

In a general partnership, each partner in the firm is deemed to be the agent of each other partner in relation to the firm’s business and has ostensible authority to bind each of the other partners, so that contracts entered into by one partner are deemed entered into and are binding on the body of persons forming the partnership as at the date of the contract. All partners are jointly liable for the contractual debts and obligations of the firm incurred while they were partners. They are also jointly and severally liable for loss arising from any partner’s wrongful or negligent act or omission: a third party suffering loss can sue and recover damages from any one or more of the partners. The partners have unlimited liability: if the firm does not have sufficient assets to pay its debts or other liabilities, then the partners will be required to make good any deficit out of their own personal assets.

All of the above characteristics apply to LPs, save that limited partners (members of the firm who do not engage in the day-to-day management of the business) will have limited liability. Recent legislation has introduced a type of LP known as a ‘private fund limited partnership’, which, subject to certain qualifying criteria, permits limited partners to not contribute capital to the LP and permits limited partners to undertake certain activities within the LP with greater certainty that in doing so they will not lose their limited liability status.

An LLP, on the other hand, is a body corporate with a legal personality separate from its members (commonly and hereafter referred to as partners save where the position of members is sought to be differentiated from that of partners in general partnerships). Save in specific circumstances, the partners enjoy limited liability. The 1890 Act does not apply to LLPs, which are governed by the 2000 Act and certain provisions of the Companies Act 2006 and the Insolvency Act 1986. An LLP is akin to a company in that each can sue and be sued and hold property in its own name, and both are required to file financial statements and register changes in membership and in persons with significant control with Companies House. The key differences between an LLP and a company are that:

  • an LLP does not have registered shares: a partner’s interest in it is simply the contractual rights (as to profits, capital, voting, etc) provided by the members’ agreement (or, in the absence of a members’ agreement, the rights provided by the statutory default rules);
  • where the rights of partners are governed by a members’ agreement, this is not publicly available (unlike company articles of association); and
  • LLPs, unlike companies, do not pay tax on their profits: they are tax-transparent entities. Partners pay tax on the share of the profits of the LLP allocated to them respectively.
Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

The key reasons for operating via a partnership structure are tax transparency, privacy, organisational flexibility and, in the case of LPs and LLPs, the ability to trade with limited liability.

All general partnerships, LPs and LLPs (except for certain non-trading LLPs) are ‘tax transparent’. The general partnership, LP or LLP is not liable for tax on the profits generated by its business. All such profits are liable to tax in the hands of the partners themselves. This is in contrast to UK companies, which are liable to corporation tax on their profits, after which the profits may be distributed (in the form of dividends) to shareholders who, assuming they are individuals, are liable to income tax on any such dividends.

A partnership also benefits from a greater degree of privacy in respect of its business than a company does: general partnerships and LPs are not required to file public financial statements, and their constitutional arrangements (including the partnership agreement) remain private. Equally, LLPs may keep their members’ agreements private, but are required to submit financial statements annually to Companies House.

General partnerships, LPs and LLPs benefit from a greater degree of organisational flexibility than a company. Whereas a company is (almost always) owned via shares, which are subject to formalities and, usually, restrictions on their issue, transfer and redemption, partnerships, LPs and LLPs do not have share capital. A partner’s interest in the business is purely contractual and entirely a function of the terms set out in the partnership or members’ agreement. This makes it much less onerous administratively to vary partner profit shares, voting and the amount of capital that partners are required to contribute.

Moreover, the mechanics involved in exiting a partner from the business are much more straightforward: rather than any formal share transfer and valuation provisions (which would be necessary in a professional services firm operated via a company), a retiring partner will simply receive what is specified in the partnership or members’ agreement, and his or her partnership share will accrue automatically to the remaining partners. His or her sole entitlement will usually be a a proportion (calculated by reference to his or her date of retirement) of his or her annual profit share for the financial year in which he or she retires and a return of any sums contributed by him or her as capital. Usually, no provision is made to compensate a retiring partner for his or her share of any increase in the value of the business during the period in which he or she has been a partner.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

A general partnership comes into existence without the need for registering with an external authority. Instead, a partnership arises where two or more persons begin carrying on ‘a business in common with a view to a profit’ (see section 1(1) of the 1890 Act).

Whether a partnership has been established in respect of any two or more persons is a question of fact: the parties cannot simply determine among themselves that a partnership exists between them. A partnership agreement is only an indication that a partnership relationship has arisen, and is not of itself conclusive. It is possible, for example, that a partnership agreement may be considered by a court or tribunal to masquerade what is truly an employment relationship. Equally, sharing returns from a jointly owned asset does not of itself indicate a partnership. A partnership can arise before trading commences, though two or more persons who jointly devise a business concept will most likely not, without carrying on the business itself, be bound together as partners.

LPs must be registered at Companies House. The registration requirements are set out in section 8A of the 1907 Act, which requires the submission of Form LP5 to Companies House (in respect of which a fee is payable) setting out various matters including the name of the firm, the nature of its business, its proposed principal place of business and the names of each general and limited partner. If a proposed LP fails to register, it will simply be a general partnership and no partners will enjoy limited liability.

An LLP is formed by incorporation at Companies House, by submitting form LL IN01. The form contains various details relating to the LLP, such as its name (which must be compliant with the requirements of the Companies Act 2006), the initial members (of which there must be at least two), and its registered office. The LLP is incorporated once Companies House has issued a certificate of incorporation. Although an LLP is not required to have a board of directors, two or more of its members must be ‘designated members’. Their function is to deal with various administrative matters required by statute, such as annual filings and the maintenance of registers. They discharge a role similar to that of company secretary and do not have any greater management powers internally than any other member, except to the extent that the LLP’s members’ agreement confers these powers on them.

LLPs must have a registered office in England or Wales and must have two or more members. Should an LLP have a single member for more than six months, that member loses limited liability status and the LLP may be struck off (dissolved). General partnerships and LPs must, by definition, consist of at least two partners. No partner in a general partnership, LP and LLP is required to be UK resident.

There are no restrictions as to the types of business that can be conducted by any of these three vehicles, provided the business may lawfully be carried on; although, some are more commonly used for particular businesses than others.