Short-form Partnership Agreement
A partnership is where two or more individuals agree to carry on a business, trade or other activity together and share the profits and losses between them. There are two main types of partnership:
- Standard (unincorporated) partnership;
- Limited liability partnership (referred to as an 'LLP').
Standard (Unincorporated) Partnership
As a standard partnership has the same legal status to that of a sole trader it is therefore a simple and flexible way to operate a business. There is no requirement to register the partnership at Companies House and consequently there is no requirement to file statutory returns and accounts. The partnership decide how to run the business and generally they share in the responsibilities and profits/losses equally, unlike shareholders in a limited company however they have no financial protection in the event that business runs into difficulties, their liability is therefore unlimited and personal assets can be claimed by creditors even if the debts were caused by the partner.
Limited Liability Partnerships (LLP)
Two or more persons wishing to carry on a lawful business (or existing partnerships) can incorporate an LLP and they have the same flexible structure as a standard partnership. The main differences are however that the LLP is taxed as a partnership and not a company and the liability of the partners (or members) is limited and so they are not personally liable for any losses (although the LLP itself is liable for the full extent of its assets).
On the other hand, an LLP requires:
- Registration with Companies House;
- More strict administration to meet Companies House rules;
- Annual publication of accounts.
Regardless which partnership model is adopted it is prudent to have a legally binding agreement in place. This can be either 'long form' or 'short form' and allows the partnership to structure the business and formalise the arrangements between the partners.
An agreement is not required by law but it is vital to avoid uncertainty and to prevent misunderstandings and disputes. Without an agreement the actions, powers and rights of each partner are controlled by the Partnership Act 1890 which can be quite arbitrary and generally unsuitable. For example, under this Act, a partner can withdraw immediately, without giving notice which could force the closure of the partnership if that partner were to withdraw their capital contribution.