Advantages and disadvantages of partnerships (UK): general, limited, LLP and alternatives

What are the advantages and disadvantages of going into business as a partnership? The answer depends on which kind of partnership you mean, because there are three main types in the UK and they differ mainly on one point: who carries personal liability for the debts. Below I go through the general partnership, the limited partnership and the limited liability partnership, and then two other options that are often a better fit, the joint venture and the collaboration.

General partnership: pros and cons

The general partnership is really quite informal. Typically it is just two or more people who come together with a view to making a profit together. They come together, they start a business, and that can be recognised as a general partnership. You do not need to register it at Companies House and there are no specific incorporation documents that need to be produced. It simply exists.

The advantage is exactly that. There are no formalities, less paperwork and lower costs in setting it up.

But there is one huge disadvantage: each of the partners has unlimited personal liability. Each partner is personally liable for the debts of the partnership. In other words, if the partnership owes a lot of money, the person who is owed that money can come after you and your house to make sure it is paid off. That is a serious risk to take on in exchange for saving some paperwork, and it is the reason many people who start out as a general partnership later look at one of the other structures.

Limited partnership (LP): pros and cons

The second main type is the limited partnership, which is not to be confused with the limited liability partnership that I cover next.

A limited partnership has at least one partner who has unlimited liability, exactly as described above, and at least one partner who has limited liability. For the partner with limited liability, the only thing they are risking is typically the amount of money they have invested into the partnership and nothing more. Their house is not on the line.

The advantage of this type of partnership is especially relevant to people who are looking to make investments. If you are an investor, you can create a limited partnership and be the limited partner: the one who puts in the money but has limited liability. If you are a busy person you might then appoint another partner who has unlimited liability, which gives them a real interest in making sure things work out. They are the ones who manage the investment for you, for example by investing in property. The structure lines up the roles: the limited partner provides the capital, and the partner with unlimited liability does the work and carries the risk that goes with it.

The disadvantage of a limited partnership is that it is not suitable for all partnerships. If you are a partnership of equals, it is very hard to negotiate for your partner to be the one who takes on unlimited liability while you do not.

Limited liability partnership (LLP) explained

The advantage of the limited liability partnership, also referred to as an LLP, is that all of the partners have limited liability. None of the partners are risking their house.

The disadvantage is that there is quite a lot of paperwork involved. There are filing requirements, and the LLP's information is held on the public register at Companies House, much like a limited company. So you trade the informality of a general partnership for the protection of limited liability, and you accept the admin that comes with it. For a closer look at how an LLP works, see what is an LLP.

How the three types of partnership compare

The pattern across the three structures is a sliding scale between informality and protection.

• General partnership: no registration, no incorporation documents, no public filings, but every partner's personal assets are exposed to the partnership's debts.
• Limited partnership: still relatively informal, with liability split between at least one partner who carries unlimited liability and at least one whose exposure is typically limited to their investment.
• LLP: registered at Companies House with ongoing filing requirements and public information, in return for limited liability for every partner.

In my experience, the general partnership is the structure people most often fall into without realising it, simply because two people started trading together. The limited liability that an LLP offers has to be chosen deliberately and comes with the admin that a limited company would also carry.

Joint venture as an alternative

A partnership is not the only way to go into business with someone. The first alternative is the joint venture.

In short, a joint venture is a separate legal entity set up by other people or entities. You might have two legal entities that already exist, and they come together and set up a third legal entity in which they are both shareholders. That third entity, the joint venture company, has a specific purpose. For example, a joint venture can be used to research new products or new inventions, with the two entities sharing the costs and sharing the intellectual property that the joint venture generates.

The advantage of a JV is that you are pooling resources together and you have limited liability, but at the same time you are not completely blending two separate businesses into one. You still keep that separation.

The disadvantage is that there are costs. You need to set up the company. You might want bespoke articles of association. You will need a joint venture agreement, which is quite a lengthy and complex document and can be costly to produce. You have filing requirements at Companies House and you have separate tax to pay. There is quite a lot to it. A joint venture is an entire business of its own.

Collaboration agreement as an alternative

Collaborations are quite informal in that there is no separate entity. Nothing is created together as a separate legal person. It is a purely contractual relationship between two different parties.

The contract, known as a collaboration agreement, specifies what the parties are collaborating on. Typically collaborations are used in the products business, where two brands come together to create one product that benefits from both brands and go to market together.

Collaborations are especially advantageous if you are doing specific projects together but you do not want a business that grows independently for the long term. It is just a project you are collaborating on. They are great for people whose skills complement each other very well but who do not intend to create a separate business that is meant to last.

That is also the disadvantage. You are not supposed to use a collaboration forever. If you want to set up an entire business together, you should either do a joint venture or a partnership instead.

Which structure should you choose?

To summarise the trade-offs:

• General partnership: cheapest and simplest to set up, but every partner has unlimited personal liability.
• Limited partnership: suits a passive investor who wants limited liability while another partner manages the investment with unlimited liability; awkward for a partnership of equals.
• LLP: all partners have limited liability, at the cost of paperwork, filing requirements and public information at Companies House.
• Joint venture company: limited liability and pooled resources while keeping the parent businesses separate, but it is a whole company to set up, document and run.
• Collaboration agreement: a contract for a specific project with no new entity, not intended as a long-term business.

The question to ask yourself is how much personal risk you are prepared to carry, and whether what you are building is a lasting business or a one-off project.

Next steps

Decide first whether you are building a long-term business or running a defined project, because that rules a collaboration in or out. Then weigh the liability position of each structure against the paperwork you are willing to take on. Whichever route you take, get the relationship documented, whether that is a partnership agreement, an LLP agreement, a joint venture agreement or a collaboration agreement, and speak to a corporate solicitor if you are unsure which structure fits.