Forming a Partnership – Limited or Unlimited?
Which partnership structure should I adopt – Limited or Unlimited?
What is a partnership and how many types of partnerships exist in the UK?
A Partnership is commercial by nature and is formed when two or more individuals collaborate in common business activities with the aim of earning profits together. Three different types of partnership exist in the UK according to different Partnership Acts
- Conventional partnership:
A conventional partnership was introduced in the Partnership Act (1890) and is taxed transparently whilst property and land cannot be held under it. In this structure, each partner has unlimited liability which is shared by each partner personally which includes:
- any losses made by their business
- all outstanding payments from their business personally
- Limited partnership:
The limited partnership structure was introduced in the Limited Partnership Act (1907) and differs from limited liability partnership. In this structure, each partner has their liability limited to their contribution to the partnership with one partner with unlimited liability
- Limited liability partnership
Limited liability partnership, which functions under the Limited Liability Partnership Act (2000) and the Companies Act (2006), is also subject to transparent taxation whilst property and land can be held under it.
Selecting a business structure can be complicated and can create many issues if selected without thinking about the short and long term benefits. It is always advisable to locate a startup accountant, an accounting firm nearby, a chartered accountant, accountant, bookkeeper or a professional who can help you set up the correct foundation for your business which helps you in the short term and the long term.
Which entities are unable to form partnerships?
- Charities and non-profit organizations do not fall under the category of partnerships.
How are partnerships taxed?
- Partnerships are subject to tax transparency which implies that every individual in the partnership is taxed individually rather than the partnership being taxed as a single entity apart from its owners.
- Special taxation is applicable to partnerships, such taxation incorporates a number of anti-avoidance and targeted anti-avoidance regulations.
- According to corporation tax rules in the UK, if the partnership comprises of a company as one of the partners then the company is taxed on the profit it earns.
What are the characteristics of the various partnerships:
Partnership Law identifies three different types of partnerships that exist in the UK
- Conventional partnership
- Limited partnership
- Limited liability partnership
The characteristics of a conventional partnership are somewhat similar to a sole trader in nature:
- Partners are responsible for their own debt whilst sharing responsibility for each other’s debt as well.
- Profits are shared according to the agreement agreed between partners whilst all the partners are subject to standard taxation individually.
- The partners who are not actively involved in managing the business may be barred from claiming sideways loss relief if the partnership suffers from losses.
- Individual partners are allowed to charge rent on the property that is let to the partnership for business purposes.
The limited partnership:
A limited partnership differs significantly from limited liability partnerships
- There has to be at minimum a single ‘general partner’ who has unlimited liability.
- Limited partners are only liable to lose the amount of capital they contributed to form the partnership if the business terminates (for reasons other than fraud or dishonesty).
- Losses incurred by the partners in a limited partnership are proportional to the amount of capital they contributed.
- A limited partner may provide the necessary initial funding but is not allowed to manage or keep the partnership together.
The limited liability partnership (LLP):
This partnership shares characteristics of conventional and limited partnerships.
- The LLP is considered as a whole separate legal body from its owners.
- In a limited liability partnership, taxation is transparent similar to taxation in a conventional partnership.
- Losses incurred by the partners are proportional to the amount of capital that they contribute.
- LLPs fall under tax anti-avoidance regulations.
- Accounts of LLPs are registered under companies house.
- Appointed partners in the liability partnership may take a role as the company officers.
- Limited liability of a partner will terminate if:
- That partner knowingly lets the LLP go bankrupt. Additionally, that partner will also be liable to pay an amount equivalent to the profits generated during the last two years of service.
- That partner took major company decisions that were inspired by his/her personal motives.
What is suitable for you, limited or unlimited?
Individuals conducting a trade or a business usually opt for an LLP due to the relaxation it offers on liabilities by making them proportionally limited to the amount of capital that each partner contributes.
On the other hand, a limited partnership is favourable for estate planning because limited partnerships are not required to register with companies house while LLPs have to. This version of the partnership makes the management of private equity and investments funds favourable and efficient as well. If you wish to take part in business but want someone else to lead it whilst you sit back and follow the directions, you should go for limited partnerships.
LLPs lets you enjoy the flexibility in general terms whilst a limited partnership is desirable if you are interested in funds, asset management or estate planning. Consult an accountant or accounting firm if you are still confused about what type of partnership to adopt and the regulations surrounding it.
Why is an agreement necessary when working with a partnership?
It’s important to have a partnership agreement in place due to the uncertainty about the life of the partnership and when it might dissolve. A partnership agreement helps establish rules and may assist in:
- Delegating responsibilities
- The succession plan
- The capital contributions
- Determining profit and loss distribution to each partner
- Dealing with the death of a partner
- Dealing with the divorce of a partner
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