What is a partnership? Types, liability and why you need a partnership agreement (UK)

A partnership is a straightforward way for two or more people to come together and run a business for profit. It is also the business structure that catches people out most often, because a partnership can exist without anyone deciding to create one, and without a partnership agreement the law fills in the terms for you. This article explains what a partnership is, the three types that exist in the UK, how liability differs between them, and why a written partnership agreement is the first thing to put in place.

What is a partnership?

A partnership is where two or more persons come together to carry on a business with a view to making a profit. That is the whole definition.

The point most people miss is that a partnership is created automatically as soon as that definition is met. You do not need a partnership agreement. You do not need to register anything at Companies House. If two people are running a business together with the aim of making money, they are, in the eyes of the law, partners, whether they have thought about it or not.

A partnership is not a limited company. A partnership has partners. A limited company, also known as an Ltd, has directors and shareholders, and it is a separate legal entity from the people who own and run it.

No partnership agreement? The default rules

If there is no partnership agreement in place, the partners share the profits and the debts of the partnership equally between them. That is the default position.

Equal sharing might be entirely unsuitable. Suppose you have invested a lot more money than your partner. In that situation you would probably want a partnership agreement that specifies you are entitled to a proportionate share of the profits, reflecting how much you have put into the business. Without the agreement, you get half, and so does your partner.

Is a partnership right for your business?

Before you go further, it is worth asking whether a partnership is the right structure at all, as opposed to a limited company or another arrangement. Part of the answer depends on which type of partnership you have in mind, because the three types differ in one crucial respect: how much of your own money and property is at risk.

Types of partnership in the UK

There are three main types of partnership:

• the general partnership;
• the limited partnership; and
• the limited liability partnership, also known as the LLP.

General partnership and unlimited liability

In a general partnership, all of the partners have unlimited liability. That means they are personally liable for the debts of the partnership. If the business cannot pay what it owes, the partners are risking their personal assets, including their car and their home. This is the type of partnership that arises automatically, so it is also the type people end up in without meaning to.

What is a limited partnership?

In a limited partnership, at least one partner has limited liability and at least one has unlimited liability. A partner with limited liability is only risking the amount of money they have actively invested in the business. For example, if they invested £100, they are only risking up to £100. The partner with unlimited liability remains personally exposed in the same way as in a general partnership.

What is an LLP?

In a limited liability partnership, all of the partners benefit from limited liability. Each partner is only risking the money they have invested in the partnership, and their personal assets are not on the line for the partnership's debts.

Partnership tax and filings

Liability is not the only factor. There are other things to consider when deciding which type of partnership is right for you, including tax considerations and filing requirements.

Filing is a good example of where the types differ. An LLP has to be registered at Companies House and has to disclose certain documents on the public register, which anyone can access online. A general partnership is not registered in that way. Whether public disclosure matters to you depends on your business, and it is worth taking advice on both the tax and the filing side before you choose.

Why you need a partnership agreement

If you are going into a partnership, you should strongly consider having a partnership agreement drafted. The reason is simple. Without one, the Partnership Act 1890 implies contractual clauses between you and your partners, and it does so without you needing to sign any document at all.

Those implied terms were written for partnerships in general, not for yours. They include the equal sharing of profits and losses described above, and they may bear no relation to what you and your partners actually intended. To avoid being bound by terms you never chose, put in place a partnership agreement that is bespoke to you and your partners' needs.

Key clauses in a partnership agreement

Some of the clauses you will want to make sure are present in your partnership agreement include:

• How profits and losses are shared. This replaces the default equal split with whatever reflects your contributions and your deal.
• How much time each partner must dedicate to the business. Disputes often start when one partner feels the other is not pulling their weight, and a written commitment heads that off.
• Non-competition restrictions. Whether partners are restricted from competing with the partnership, and on what terms.

These are the starting points. A well-drafted agreement will also deal with the other situations partners tend to fall out over, but if you cover nothing else, cover these three.

Next steps

Decide which type of partnership suits you, taking liability, tax and filing requirements into account, and consider whether a limited company would serve you better. Then have a partnership agreement drafted before you start trading together, not after a disagreement. If you are unsure which structure fits, speak to a corporate solicitor about your plans.