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When two or more people want to go into business together, a partnership is often the preferred way of doing so. An unlimited partnership is simply a way of joining two or more people in a business.
Individuals are personally liable for all the debts incurred in the running of the partnership business. Accounting is relatively simple. Each partner’s income from the partnership is treated as personal income on which they pay income tax at the appropriate rate.
An LLP is a relatively new form of business model which shares many of the features of an unlimited partnership, but offers reduced personal liability for the debts of the business.
The LLP has its own legal status. The individuals are members of the LLP (similar to shareholders of a company). This means that it is the LLP itself which is liable for the debts incurred in running the business, rather than the individual members.
Profits of the LLP are split between the members. Liability to pay tax is on the individual members (not the LLP itself), who will pay income tax on their allocated profit at the appropriate rate.
Unlike an unlimited partnership, an LLP has to be formally documented, set up in accordance with the relevant legislation, and registered at Companies House. However an LLP is different to a limited company. In the case of a limited company it is the company which will pay corporation tax on its profits, before distributing monies to its shareholders, whereas individual members of an LLP remain liable for their own tax on the profits they receive.
In the absence of any signed documentation, the partnership is known as a “Partnership at Will”, and its terms will be governed by the Partnership Act 1890.
As such, the Partnership at Will continues as long as the partners want it to continue. This means that it can be bought to an end on notice - for example a couple of hours.
When the partnership is bought to an end, all assets (including intellectual property and the business name) must be sold and the creditors must be paid. Once this has taken place, any surplus money can then be paid to the partners.
This process of bringing the partnership to an end in this manner can cause a great deal of disagreement about how to deal with for example the intellectual property of the business, and who gets access to the databases and the partnership’s clients.
It is therefore always much better to have a properly drafted partnership agreement, which will provide for continuation of the business when a partner leaves. It will also deal with how a partner’s departure should be dealt with financially. It can provide certainty for new members joining, and deal with such matters as profit sharing, management, duties and rights, expulsion and so forth.
In the case of an LLP, the absence of an express agreement to the contrary means that the rules which apply to the running of the business are those contained in the Limited Liability Partnerships Act of 2001. As in the case of the Partnership Act 1890, these “default” rules are not detailed enough for most LLPs. Therefore a properly drafted LLP agreement is recommended to provide certainty for the members regarding such matters as profit shares and management, duties and responsibilities, expulsion and termination.
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