Partnership

A partnership is simply a business owned by two or more people that hasn't filed papers to become a corporation or a limited liability company (LLC). No paperwork needs to be filed to form a partnership -- the arrangement begins as soon as you start a business with another person. As in a sole proprietorship, the partnership's owners pay taxes on their shares of the business income on their personal tax returns and they are each personally liable for the entire amount of any business debts and claims.

Sole proprietorships and partnerships make sense in a business where personal liability isn't a big worry -- for example, a small service business in which you are unlikely to be sued and for which you won't be borrowing much money for inventory or other costs.

That type of organisation works well when circumstances are suitable. It is the norm for firms such as accountants and solicitors where individuals need to preserve a degree of independence but also share the cost of facilities, e.g. offices, insurance cover, secretarial services, etc. Also many family run businesses benefit from this type of organisation so that working family members are partners and therefore co-owners of the business and its assets. It is also worth a mention that by registering under the Limited Partnership Act of 1907 it can provide protection for what are called Limited Partners. This Act distinguishes between Limited Partners who contribute capital but take NO active part in running the business and General Partners who may contribute capital and also work in, or manage the business. Limited partners are NOT liable for business debts beyond the amount of capital they have already contributed while General Partners are completely responsible for all debts of the business. The downside to being a partner is:

1) Generally all partners are 'jointly and severally' liable for the debts of the business. This means that if one or a group of partners incurred business liabilities that could not be paid then EVERY individual partner could be liable for the whole debt and it is entirely at the discretion of the creditor(s) against whom the action is taken. However, all is not doom and gloom as this problem has been mitigated by the Limited Liability Partnership Act of 2000. This Act requires the registration of the Partnership with Companies House and effectively limits the liability of each partner so that their personal assets are beyond the reach of business creditors.

2) All partners are assumed to have authority to act as agents of the partnership and their actions are binding on all the other partners.

3) A partnership deed will be required to guard against imposition of the less desirable terms of the Partnership Act 1890, e.g. if a partner wants to leave the business it must be wound up and the proceeds distributed amongst the partners. This would be undesirable if the business was perceived as a valuable ongoing concern. 4) Partners are all taxed on their proportion of the Partnership profits and like a sole trader could be paying the maximum rate of 40%.

5) For family run business the passing of time can create enormous problems in succession planning as individuals attempt to leave their assets including partnership share to their heirs.