In business there is often some kind of partnership formed, but what different partnerships are there and how can you choose which one is right for you?
A partnership is a formal agreement whereby two people come together to manage and operate a business and share in the profits. In the UK this is a very common way for a business to form and therefore knowing which one is right for you is important.
A partnership in business is often referred to as a marriage and rightfully so. Whatever happens because of one partner can greatly affect the other person. However, there are a few kinds of partnerships that can actually lessen these risks.
In this article, we will learn the 3 main types of partnerships and their differences, as well as what legal documents are needed when joining into a partnership.
What makes a Partnership different to other business entities?
A partnership differs from other business entities in the way that the taxation is less and starting up a business in this way and keeping it running is also more cost-effective.
The main types of Partnerships defined
As mentioned before, there are 3 main types of partnerships and they each have their own unique traits. Which one you choose will depend entirely on your business model and the person/people you are going into business with.
Let us take a closer look.
General Partnership
In the colloquial sense, this is often referred to as a “firm”. It is a type of partnership that is more widely used.
This type of partnership is very simple and transparent. It does not need to be filed with any particular jurisdiction or state entity. More often than not a general partnership is joined into when the partners sign a partnership agreement (we will discuss this later on).
When it comes to profits and losses, generally these will be split evenly, unless otherwise stated with the partnership agreement.
A key point in a general partnership is that each individual partner has the power to enter into loans and agreements independently. In return, all partners in the business can be held liable for any debts incurred. Even if only one partner has entered into the loan agreement.
This particular partnership is easy to enter into and just as easy to dissolve.
Limited Partnership
A limited partnership is the more legal type of partnership. It is often endorsed by the jurisdiction in which they are formed.
There’s one major difference between a limited partnership (LP) and a general partnership. In an LP you have one main partner who is responsible for all the legal parts of the business. Joining this partner will be 1 or more limited partners.
The role of the limited partners is purely financial. They will have little to no say in the managing of the actual business partnership. These terms will always be set out within the partnership agreement. Along with any additional documents which may be necessary.
Limited partners will share in the profits. But will not share in any debts or liabilities. That onus will be completely on the main partner.
Should a limited partner decide to partake in the management of the business at any given time. They are likely to lose their LP status. Therefore they will be held liable for all things that pertain to the business entity.
Limited Liability Partnership
The third type of partnership is a Limited Liability Partnership (LLP). This particular partnership can be likened to a combination of a partnership and corporation.
The main difference between an LLP and an LP is that when you enter into a limited liability partnership one or more of the partners involved can have liability within the business. In an LLP other partners are not liable for another partner’s misconduct. It is solely on them to take the responsibility.
Limited liabilities can be very similar to shareholders within a corporation. The only difference is that a partner can manage the business independently. Whilst in a corporation the shareholders would need to be informed and give consent.
Now that you have been introduced to the main types of partnerships, which one is right for you?
If you still have not decided that is all to be expected. So next we will look at some of the advantages and disadvantages when it comes to certain partnerships versus another. As well as what the pitfalls are when partnering with people you know, i.e friends and family.
Make sure you consider all your options
As mentioned before, a partnership is one of the leading ways that businesses are formed within the UK. But that is not to say that collaborating in a partnership is easy or always works out for the best.
For instance, things you should consider include who you are partnering with and the most important is what sort of partnership you will choose according to your business model.
Partnering with family is easy and everyone has good intentions in the beginning. But when you have a friend or family member as a partner in your business, the line is easily blurred.
Therefore it is important that all members are in agreement to the terms and conditions of the partnership. This is where having a legal consultant draft a proper Partnership Agreement is imperative.
Partnership Agreements – what you need to know
Once you have established who your partner/s will be and what kind of partnership you will be entering into. You will then want to get in touch with a legal consultancy such as K&K Consulting. It’s important to put in place the necessary agreements and statutory documents needed to cover all parties involved.
Some of the things that need to be clarified in an agreement:
Who does what
Make sure that your agreement clearly defines who will contribute what. Also to what extent each member will be held liable for actions taken within the business.
Who gets what
At the end of the day when you enter into a business partnership the end goal for all concerned is to make money. It is therefore imperative to include a clause stating how profits will be distributed between the members.
What happens when something changes
For instance if the business is sold, who gets what? Who is allowed to execute the sale in the first place? Where does everyone stand on the idea of allowing new partners into the business? These are all very relevant and need to be added into the agreement.
The decision making
You and your partner/s will never completely agree on everything all the time. But having an idea of who manages what and coming to some form of agreement/compromise is important if the business is to thrive. This needs to be clearly stated within the agreement before anything else happens
Conflict resolution
Again, no one ever gets on and agrees on everything all the time, so there is bound to be conflict. You need to be sure how things will transpire if this happens. It needs to be clearly stated and agreed upon in the partnership agreement
Critical developments
This would pertain to things like a partner dying or leaving the partnership completely but the business is still active. The business liquidating, retirement annuities for partners and so on.
Finally, your partnership agreement must state how your and your partners will dissolve the partnership. Also how things will work during that time until everything is completed.
These are all critical points that need to be addressed and agreed upon upfront and before you even enter fully into the partnership and start the business. Having the correct documents upfront will save you a lot of headaches down the line – trust us!
Conclusion
As you can see, there is a lot to consider and especially so if your partner/s are friends or family. You will need to think long and hard about how to handle all the issues that may come along. That will also ultimately determine which one works best for you.
Partnerships really are great because they are less formal, easier to start up and having a number of partners mean you have a diverse skill set and knowledge base. But not having proper legal status and limited access to funding can make things a little less rosy. However, whatever you decide, always be sure to chat with legal experts or someone who has successfully entered into a partnership. It usually helps to see things from a different perspective.