Overview & FAQs

There are three different types of partnership defined in partnership law:

The conventional partnership

This type of partnership is defined by the 1890 Partnership Act as "Partnership is the relation which subsists between persons carrying on a business in common with a view of profit".

• The expression “business” includes every trade, occupation, or profession.
• The receipt by a person of a share of the profits of a business is primâ facie evidence that they are a partner in the business.
• Interests in land:
  • A joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership whether the tenants or owners do or do not share any profits.
  • The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.

Many of the conventional partnership's key features are similar to those for a sole trader.

• Partners are responsible for their own and each other's debts.
• Partners are taxed on all the profits, although their share of the profits will vary by agreement.

There are some significant differences.

• If the partnership makes a loss, partners may be restricted by the amount of capital they have contributed to the partnership when claiming Sideways loss relief. Sideways loss relief is the offsetting of losses against other income. Those partners who are not fully participating in the business may face further restrictions. See Partnerships: Losses.
• Individual partners may rent property to the partnership for use in its business.

The Limited Partnership (LP)

This type of partnership is governed by the 1907 Limited Partnership Act. It is not to be confused with a limited liability partnership (LLP).

Key features

• At least one partner must have unlimited liability and they are referred to as a 'general partner'.
• A limited partner's liability is capped. In the event of business failure (unless there was fraud or something similar) they will only lose the capital contribution that they may have made to join the partnership.
• The common set-up is that the limited partner will provide initial funding. It is not permitted to participate in management or bind the partnership.
• A limited partnership’s entitlement to losses is restricted pro-rata to its capital contribution.

The Limited Liability Partnership (LLP)

This trading vehicle is a cross between a conventional partnership and a company. It has the best features of each. LLPs are governed by the 2000 Limited Liability Partnership Act and the 2006 Companies Act.

For a limited liability partnership to be incorporated, two or more persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document.

"Business” includes every trade, profession and occupation.

The LLP Act does not mention interests in land.

Key features

• An LLP is a separate legal entity to its members (the partners).
• LLPs have designated partners who are the equivalent to company officers.
• LLP accounts are filed with Companies House.
• Partners have limited liability unless:
  • The LLP becomes insolvent and the partners knowingly allowed this to happen, in which case they may be required to repay their profits of the previous two years.
  • A partner is found to be at fault at a time when he was acting under his own personal capacity.
• An LLP is normally taxed transparently as if it were a conventional partnership, there are occassions when an LLP can become opaque and is then treated as a company.
• Losses are restricted in proportion to each partner’s capital contribution.  See: Partnerships: Losses.
• LLPs are subject to substantial tax anti-avoidance legislation. See Partnerships with mixed membershipand Salaried members: When is a partner taxed as an employee?

Limited or unlimited partnership?

The LLP is the favourite type of partnership for most individuals who are conducting a trade or business because it affords the partners the protection of limited liability.

A 1907 Act limited partnership (LP) is useful for estate planning. An LLP has to file its accounts with Companies House, but a limited partnership does not.  LPs have long been the favourite vehicle for private equity and investment funds. It has the flexibility to allow for various partnership interests. A n LP can also be useful when one partner wishes to have limited liability as they move to taking a back seat in the business.

If you are looking for a flexible trading vehicle in general terms, then consider a conventional unlimited partnership or an LLP. If you are looking at fund or asset management then perhaps consider a limited partnership.

Do we need a partnership agreement?

Partnerships are relationships and any relationship may go wrong. It is sensible to have a partnership agreement in place to determine (the following list is an absolute minimum):

• Profit share.
• Capital contributions.
• How to deal with the arrival and departure of a partner.
• Succession.
• Death of a partner.
• Divorce of a partner.
• Partnership assets (especially for Business Property Relief for Inheritance Tax (IHT)).

See: Partnership agreements: What should be considered?

See Partnerships agreements: A cautionary tale

Tax planning and partnerships

Family partnerships are a useful tool in estate planning and can also be very tax-efficient in terms of income and capital taxes,

Useful guides on this topic

Will I pay less tax if I trade in partnership??
Will I pay less tax if I trade via a partnership or a LLP compared to if I trade via a company or as a sole trader?

A new partnership? Start here...
This freeview 'At a glance' guide is essential reading for anyone thinking about starting up a new partnership.