Different Types Of Partnerships: FAQs

Last updated: 23 March 2020

Estimated reading time: 13 minutes

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Under English law, there are different types of partnership arrangements: general partnerships, limited partnerships and limited liability partnerships (LLPs).

Similar in some ways but very different in others, it is highly recommended that they all have a written agreement in place which sets out the main terms of the partnership and the relationship between the various partners. This ensures certainty and overrides the default positions given under legislation, which do not usually reflect the agreement between the partners.

Here, we explain the various types of partnership, the position given in the relevant legislation and how a partnership agreement may differ.

Jump to:

  1. What is a partnership?
  2. What is a partnership agreement and when should you use one?
  3. What are the different types of partnership?
  4. Is a partnership a separate legal entity?
  5. How is a partnership set up and what are the filing requirements?
  6. How long does a partnership last?
  7. How many partners do you need?
  8. Is a partner’s liability limited?
  9. How are profits and losses shared?
  10. How is a partnership taxed?
  11. How is the partnership business managed?
  12. How are capital contributions decided?
  13. Can a new partner be admitted to a partnership?
  14. Can a partner retire or withdraw?
  15. Should restrictive covenants be included in the partnership agreement?
  16. Can a partnership dissolve or terminate?
  17. Can partners be unfairly dismissed or bring discrimination claims?
  18. What happens if there is a partnership dispute?

What is a partnership?

A partnership is the relationship between at least two people who are carrying on a business with a view to making a profit. As such, partnerships must have at least two partners and although a profit does not actually have to be made, there must be the intention to make a profit. Not-for-profit organisations cannot, therefore, be run as partnerships.

What is a partnership agreement and when should you use one?

A partnership agreement is the document that governs the relationship between the partners in a partnership. Although not required for a partnership to be in existence, it is highly recommended to have one in place whatever the type of partnership.

Each partnership-type is governed primarily by legislation but often, the position set out in the legislation will not reflect how the partners wish their partnership arrangement to work in practice. For example, under the relevant legislation, partners share equally in the profits of the partnership. In practice, many partnerships wish to allocate the profits differently, perhaps in accordance with each partner’s seniority or the amount of business brought in by each partner. A partnership agreement will set out the agreed terms and can override many of the legislative provisions, resulting in certainty between everyone involved. Partnership agreements are private documents and so confidentiality should not be a concern.

Even where the partnership is a straightforward relationship between two partners who share everything equally and who are firm friends or relatives, a partnership agreement should be drawn up. Ideally, it will never need to be used and the relationship will continue on an amicable footing but unfortunately, relationships do often break down or disagreements arise and a written document setting out the position can help to resolve the conflict quickly and may possibly result in the relationship being saved.

Consideration is needed when preparing a partnership agreement and legal advice is recommended.

What are the different types of partnership?

Under English law, there are three different types of partnership:

Is a partnership a separate legal entity?

Whether a partnership is a separate legal entity, able to hold assets in its own name, create a charge over those assets and enter into documents in its own name, will depend on the type of partnership:

General partnership Limited partnership LLP
Not a separate legal entity Not a separate legal entity A separate legal entity  

For general partnerships and limited partnerships, the partners or general partner will act as agents of the partnership and have wide authority to bind the partnership. Note that a limited partner is unable to enter into documents or arrangements on behalf of the limited partnership.

How is a partnership set up and what are the filing requirements?

The setting up of a partnership and its ongoing filing requirements will all depend on the type of partnership:

General partnership Limited partnership LLP
No incorporation / registration requirements.  

No ongoing filing requirements.
 
No constitutional documents.  

Partnership agreement highly recommended.
 
Partnership agreement is a private document.  
Must be registered at Companies House.
 
Limited ongoing filing requirements.
 
No constitutional documents.
 
Limited partnership agreement highly recommended.
 
Partnership agreement is a private document.  
Must be incorporated at Companies House.  

Various ongoing filing requirements.  

No constitutional documents.  

LLP agreement highly recommended.  

Partnership agreement is a private document.

How long does a partnership last?

A partnership may be set up to last indefinitely, for a fixed term or for completion of a specific project. Termination or dissolution of the partnership should be dealt with in the partnership agreement.

How many partners do you need?

Any partnership requires at least two partners but there is no maximum number, unless one is given in the relevant partnership agreement. That said, the different partnership types have different specific requirements regarding the number and type of partners:

General partnership Limited partnership LLP
At least two partners At least two partners comprising: at least one general partner; and at least one limited partner   At least two partners (or members) with at least two designated members. Failure to name two designated members will result in all of the partners being deemed designated members  

The partners each have to be a legal ‘person’. As such, they can be individuals, companies, LLPs or a combination.

Is a partner’s liability limited?

Whether a partner’s liability is limited will depend on the type of partnership and in the case of limited partnerships, on the type of partner:

General partnership Limited partnership LLP
All partners have unlimited liability The general partner has unlimited liability (and as a result, is often a limited liability entity), while the limited partner has limited liability   All partners have limited liability (except in certain situations)  

Note that partners in limited partnerships will lose their limited liability status if they get involved in the management of the limited partnership.

How are profits and losses shared?

Unless a partnership agreement is in place, the partners will share equally in any profits of the business. Losses will also be shared equally, except that partners in LLPs will not be liable to third parties because they have the benefit of limited liability. 

A partnership agreement will often allocate profits and losses between the partners differently. This may reflect a partner’s seniority, financial contribution to the partnership, the amount of business brought in by a partner, and so on; the partners can allocate the amount of profits and losses as they choose. For example, partners in an LLP may be split into equity members and fixed share members. Equity members make a capital contribution and are entitled to a share in any profits, whereas fixed share members receive a guaranteed minimum payment similar to a salary but have a lower equity holding.

How is a partnership taxed?

All three partnership types are ‘tax transparent’. As a result, a partnership itself cannot be taxed; instead, it is the individual partners who are taxed. Further discussion of the tax position of partners and partnerships is beyond the scope of this note.

How is the partnership business managed?

The management of the partnership business will depend on the type of partnership in question:

General partnership Limited partnership LLP
Partners manage the business General partner manages the day-to-day operation of the business. Any involvement in the running of the business by a limited partner will result in them losing their limited liability status   Partners manage the business although at least two designated members need to be appointed to deal with administrative tasks, such as filings with Companies House, signing the accounts, and so on  

A partnership agreement will usually set out more detailed provisions dealing with the management of the business, although it should never allow a limited partner to get involved with the management of a limited partnership business.

Partnership agreements may, for example, specify how often partnership meetings will be held and may set up committees or senior management groups to deal with specific issues. They can also determine each partner’s voting rights and list matters which require a certain level of consent or even unanimity, for example, changing the nature of the partnership’s business.

Determining how management of the business will be conducted will often depend on the size of the partnership, the reason for the partnership and the business of the partnership. For example, a general partnership with two partners running a local business will be conducted very differently from a national law or accountancy firm with fifty partners. Similarly, partners in a partnership which is set up for a specific project are likely to require unanimous consent to a different list of issues than partners in a partnership which has been set up for general trading purposes.

How are capital contributions decided?

Partners often provide capital contributions to the partnership upon becoming a partner. The amount required may be the same for each partner or specified in the partnership agreement. Partners may also contribute certain assets to the partnership. It is important to be clear as to the contributions of each partner and whether any property is owned by the individual partners or is partnership property. This will become relevant in the case of insolvency or bankruptcy or if the assets’ value increases.

Guidelines on capital contributions

  • The amount of capital contribution for partners in a general partnership should be set out in the partnership agreement.
  • In relation to limited partnerships, there is no statutory obligation on a general partner to provide capital to the business, although the limited partnership agreement may provide otherwise. Limited partners do have a statutory obligation to provide capital, although given that their liability is limited to the amount contributed, this is often a nominal amount with any additional amounts being provided by them by way of loan. The partnership agreement should deal with how any such loans are to be repaid.  
  • There is no statutory obligation on members of an LLP to provide a capital contribution although the LLP agreement will usually provide otherwise.

Can a new partner be admitted to a partnership?

Yes, new partners can be admitted to each type of partnership.

  • Unless otherwise provided in the partnership agreement, the admission of a new partner to a general partnership must be agreed to by all of the existing partners. If no provision is included in the partnership agreement for admission, the partnership will continue ‘at will’. It is therefore important that the partnership agreement covers admission of new partners.
  • Statute provides that a general partner in a limited partnership may admit a new general partner or a new limited partner without the consent of the existing limited partners. Given the need for a general partner to manage the limited partnership’s business and that admitting a new partner will affect the existing limited partners’ interests, the partnership agreement will usually provide that the limited partners must also agree to the admission of either a new general partner or new limited partner.
  • To admit a new partner to an LLP, unanimous consent is required from the existing partners. However, this can be amended in the LLP agreement.

It is important that all new partners agree to be bound by the partnership agreement.

Can a partner retire or withdraw?

There are various circumstances by which a partner can retire or withdraw from a partnership.

  • A partner may leave a general partnership by consent of all the existing partners or as a result of death or bankruptcy. It is common for the partnership agreement to also provide for voluntary (and sometimes, compulsory) retirement.
  • Subject to the partnership agreement, a general partner can retire from a limited partnership by giving notice, unless the partnership is for a fixed term. The retirement of the general partner may result in the dissolution of the limited partnership and so it is important that the partnership agreement clearly sets out when and how a general partner is permitted to retire. A limited partner may also withdraw from a limited partnership by assigning their partnership interest with the consent of the general partner. Again, this can be modified in the partnership agreement.
  • Under the Limited Liability Partnership Act 2000, a partner of an LLP can leave the LLP if they die or (if they are a body corporate) are dissolved, if the partners agree or by giving reasonable notice. The LLP agreement may also include voluntary retirement and withdrawal as a result of mental incapacity or following bankruptcy or insolvency.

Expulsion of a partner from a general partnership, limited partnership or LLP is not permitted unless otherwise provided in the relevant partnership agreement.

A partnership agreement should also clearly set out the position of the withdrawing partner in terms of their financial rights and obligations, and confidentiality obligations. It should also detail whether a partner’s interest can be transferred to a third party or to another partner and if so, how.

Should restrictive covenants be included in the partnership agreement?

Restrictive covenants are often included in a partnership agreement to protect the partners and the business. Partners in a general partnership and in a limited partnership each owe a duty of good faith to each other, but this is not the case for partners in an LLP, unless it is specified in the partnership agreement.

In addition, restrictive covenants are often included in a partnership agreement to prevent partners who have left the partnership from soliciting clients, poaching employees, working for competitors and so on. Careful drafting is required in relation to restrictive covenants to ensure that they are enforceable. Unreasonable restrictions will not be valid and legal advice should be sought.

Can a partnership dissolve or terminate?

Yes, partnerships can be dissolved or terminated. Certain dissolution provisions are set out by statute, while the relevant partnership agreement may also provide for dissolution situations.

A general partnership will dissolve once the partnership relationship has ended. Under the Partnership Act 1890, a general partnership can be dissolved by:

  • Unanimous consent of the partners
  • Fraud or misrepresentation by one of the partners
  • The end of the fixed term of the partnership or completion of the project for which the partnership was originally set up
  • Notice by any partner
  • The death or bankruptcy of a partner or
  • A charge being created over a partner’s share of the partnership property, as a result of illegality or by way of a court order

A partnership agreement may also provide that dissolution may occur if a certain number of partners agree. 

A limited partnership will dissolve once the partnership relationship has ended. A limited partnership can be dissolved by:

  • Unanimous consent of the partners
  • Fraud or misrepresentation by one of the partners
  • The end of the fixed term of the partnership or completion of the project for which the partnership was originally set up
  • Notice by the general partner (subject to the partnership agreement)
  • There being no general partner
  • A charge being created over the general partner’s share of the partnership property (subject to the unanimous consent of all the general partners and limited partners), as a result of illegality or by way of a court order

The partnership agreement may make more detailed provisions regarding dissolution and can provide that the limited partners can consent to the dissolution, although care should be taken that this does not deem them to be involved in the management of the limited partnership, as this could cause them to lose their limited liability status.

Because an LLP is an incorporated entity, certain formalities need to be taken to dissolve or terminate an LLP, including the completion of various forms and filings at Companies House. The LLP can be dissolved:

  • By agreement by the majority of its partners
  • By unanimous agreement if there are only two partners, or if there is only partner, by that partner alone

Can partners be unfairly dismissed or bring discrimination claims?

Partners can be subject to discrimination and are able to bring a claim accordingly. It is important to remember that these rights are not lost simply because a partner is not an employee of the partnership.

Case law has held that a partner of an LLP can also be an employee and as such, is able to bring a claim for unfair dismissal. Care should therefore be taken when expelling any partner. Legal advice should be taken.

What happens if there is a partnership dispute?

It is imperative that the partnership agreement sets out a dispute resolution mechanism in order that any partnership disputes can, hopefully, be resolved swiftly and amicably without having to resort to dissolving the business. Such a provision could, for example, refer to mediation or arbitration.

Whatever the type of partnership, it is crucial that a legally-sound, comprehensive partnership agreement is put in place so that all involved understand their rights, duties and obligations and to provide certainty. Harper James has experienced corporate solicitors who are more than happy to prepare such an agreement for you and/or to discuss any partnership-related queries or issues that you may have.

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