What is a partnership?

A partnership is a group of persons acting in concert with a view to making a profit. A partnership can comprise individuals (one or more of whom may be a sleeping partner or a limited partner) can include one or more limited companies, or could be registered as a limited liability partnership.

In general terms, the partners in a firm are jointly and severally liable for the firm’s debts, though we can advise on the impact of limited liability partnerships or of being a limited or sleeping partner if requested.

Terms often used in partnerships are “equity partners” and “salaried partners”, or even “directors”. Broadly, with the exception of the Inland Revenue, the outside world does not distinguish between equity and salaried partners, all partners are assumed to be the same. Usually, though, a salaried partner will have a salary and will be treated for tax purposes as though he or she were an employee. They may well receive a bonus but will not share in the firm’s profits (or losses) as such and will usually have some form of indemnity from the equity partners so that he does not have to contribute if the firm makes losses. The equity partners own the firm.

A sleeping partner is one who does not take an active part in the management of the business. For tax purposes, there is no distinction between a sleeping partner and an active one. Where a partnership includes a sleeping partner there must be at least one unlimited partner.

A relatively new concept in the UK is that of limited liability partnership (LLP). To be a LLP the firm must register as such at Companies House. On its business stationery the fact that it is a LLP must be stated and accounts must be filed at Companies House each year. Provided the business does not trade fraudulently, trading as a LLP means that the partners do not have unlimited liability for the firm’s debts.

All partnerships should draw up and adhere to a formal partnership agreement. This will normally set out how profits and losses are to be shared, how management decisions are to be reached, authority limits, how new partners will be admitted, how partners will retire and how to deal with things if a partner dies. If no partnership agreement is in force, the Partnership Act comes into force automatically. Among other things the Act presumes that profits and losses are to be split equally between the partners.

Partnerships can become quite involved with profits being split in one way and ownership of certain assets split in another. We can advise on this as necessary.