Partnerships & Partnership Agreement Form
Important Note
This article should be used as a guide only. The following information is believed to be accurate but only in general terms. Further professional advice should be consulted if you wish to set up a partnership in business.
What is a Partnership?
In general terns, a partnership is where a business is run by a number of joint owners. These owners (partners) share the responsibility of running the business and therefore any decisions and actions made should be agreed by all partners.
Profits are also shared along with any liabilities that are accumulated no matter who was originally responsible for generating the debt.
For a business to be considered legally a partnership there has to be at least two owners and no more than twenty (unless it is a limited partnership: see next section). Behind sole-traders, a partnership is the second most popular type of business and is more commonly associated with professional services such as accountants, solicitors and doctors. It is also common in partnerships for each partner to specialise in a specific area of the business. For example, in an accountancy service, one partner may specialise in book keeping, another partner may specialise in financial advice, and so on… You have to be aware that because any decisions and actions are dependent on the other partners agreeing, certain conflicts may arise from time to time. Such conflicts have led to partnerships failing and so it is important that some control can be maintained by compiling a ‘partnership agreement’ prior to starting the business. This agreement will be outlined later in the article.
Types of Partnerships
There are two main types of partnerships: 1. THE FULL PARTNERSHIP, which is the scenario outlined above and is subject to The Partnership Act, 1890. Full partnerships, as outlined above, have between two and twenty partners, but more commonly the number of partners in a full partnership lies between two and four inclusive. 2. THE LIMITED PARTNERSHIP, which is subject to The Limited Partnership Act, 1907. Also known as Limited liability partnerships, they are very rare today and account for less than 1% of all partnerships in the UK. A limited partnership is formed when one or more of the partners invest capital into the business but do not participate in running and managing the business. These partners therefore have limited liability as they can only lose the amount of money that they initially invested into the business.
In a limited partnership, the law states that there must be at least one partner that has limited liability and at least one partner that has unlimited liability. Consequently, the law further allows this type of partnership to have more than 20 owners.
Advantages of a Partnership
- The workload can be shared between partners
- Each partner may specialise in their own area of the business
- More finance can be raised then, say sole-traders, due to more owners investing in the business
- Due to the business being generally larger than a sole-trader, it has a better chance at generating other sources of finance e.g. bank loans, etc
- There are no legal formalities to complete prior to starting the business
- Partners can cover each other during times of absence, e.g. holidays or illnes
Disadvantages of a Partnership
- Profits are shared between partners
- Decisions may take time to reach due to other partners disagreeing
- Partners are equally responsible for liability (stated by The Partnership Act, 1890)
- Any actions and decisions based on the business are legally binding to ALL partners
- A partnership is terminated when a partner dies and therefore the process of forming a new partnership has to be taken
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