Partnerships v LLPs
This article will uncover what the differences are between a general partnership and a LLP.
Partnerships v LLPs
A common business vehicle used in the UK is a Partnership, there may be a number of reasons why an individual may choose to set up a Partnership as opposed to a limited company such as tax benefits. A partnership is the relationship which subsists between two or more persons carrying on business in common with a view to profit.
This article will uncover what the differences are between a general partnership and a limited liability partnership.
Partnerships v LLP's
A Partnership is a type of business structure where two or more persons own and operate the business together sharing profit, responsibility and the management of the business partnership. The partners share the profits, losses, and liabilities of the business. Partnerships are not separate legal entities from the partners, and they are personally liable for the debts and obligations of the business.
On the other hand, a limited liability partnership (LLP) is a type of business structure that provides the benefits of both a partnership and a corporation. In limited business partnership(s), the limited partners have limited liability for the obligations of the business, and they are not personally liable for the actions of other partners. This means that the general partners' personal assets are protected in case of any legal action against the business.
Some examples of partnerships include law firms, accounting firms, and medical practices. In these cases, the partners work together to provide services to clients and share in the profits and losses of the business. Partnerships can also exist in other industries, such as retail or real estate, where two or more individuals may come together to start a business.
Partnerships should be wary of the potential for personal unlimited liability for the debts, profit and obligations of the business. A partner may be held personally responsible for the actions of other partners, and this can leave their personal assets, resources and money of the firm at risk.
Additionally, partnerships should have a clear and comprehensive agreement that outlines the rights and responsibilities of each partner to the business, as well as procedures for resolving disputes and making important decisions.
A partnership agreement is a legal document that outlines the rights and responsibilities of each partner in a partnership business. It typically includes information about how profits and losses will be divided, how decisions will be made, and how disputes will be resolved. Other important details such as the capital contributions of each partner, the length of the partnership, and the process for admitting new partners may also be included.
The agreement may include provisions on whether there are silent partners, how the partnership may be terminated, what businesses the partnership may or may not work with, what industries the partnership may get involved with, the distribution of profits if unequal and how the partnership continues when an existing partner exits the business.
What is the difference between a Partnership and a Limited Liability Partnership?
In England and Wales, a limited liability partnership (LLP) differs from a partnership in that the partners in an LLP have limited liability for the debts and obligations of the business. In a traditional partnership, the partners have unlimited personal liability.
Additionally, an LLP is a separate legal entity from its partners, which means that it can own property, sue and be sued, and enter into contracts in its own name. This is not the case for a traditional partnership, where the partner(s) are personally liable for the debts and obligations of the business, and the partnership is not a separate legal entity.
A limited partnership limits the partners liability to the nominal value of his/her investment or other value as stipulated in the partnership contract. Whereas a standard partnership carries unlimited liability for the partner(s) who enters into the partnership together as such they are responsible for the partnership's debts.
What is the Partnership Act?
The Partnership Act 1890 is a UK law that governs partnerships. It is an essential law for all partnerships in the United Kingdom.
The legislation outlines different provisions on how partnerships are formed, the rights and obligations of partner(s), and how disputes are resolved. It is important to note that the Partnership Act 1890 is a default set of rules, and partnerships may choose to modify these rules through an agreement.
Key provisions of the Partnership Act
One of the key provisions is that partner(s) have to share the profits and losses of the partnership business equally, unless there is an agreement in place that states otherwise. This provision ensures that partners are treated fairly and that no one partner is unfairly favored over another.
Another important provision is that partner(s) must act in good faith and with mutual trust towards each other. This means that partner(s) must always act for the benefit of the partnership and not for their own personal gain.
Partners must also be honest with each other and disclose all relevant information about the partnership.
The Partnership Act 1890 also provides partner(s) with the ability to expel other partners under certain conditions. For example, a partner may be expelled if they become bankrupt or if they are found guilty of serious misconduct.
The legislation governing partnerships outlines the procedures that must be followed when expelling a partner to ensure that it is done fairly and legally.
Overall, the Partnership Act 1890 is an important law for partnerships in the UK. It provides a default set of rules that can be modified by partnerships through a partnership agreement. The legislation ensures that partnerships are governed fairly and that all partners are treated equally.
In summary, partnerships are simple and flexible business structures, but the partners have unlimited personal liability as the partnership is not a separate legal entity. A limited partnership offers limited liability protection to the general partners/owners, but they are more complex and require formal registration with the government.