Why is it important to have a partnership agreement?
If you are considering going into business with a partner or group of partners it is highly advisable to enter into a partnership agreement.
A partnership is a relationship between individual partners. Partners are jointly liable with the other partners for all the debts and obligations that the partnership incurs while they are a partner. On the positive side the partners between them own all the assets and are entitled to all the profits generated by the partnership.
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It is defined in the Partnership Act 1890 as ‘the relation which subsists between persons carrying on a business in common with a view of profit’.
The partners in a partnership are the persons who are 'carrying on a business in common with a view of profit'. In principle any individuals over the age of majority and with full mental capacity can be partners.
Whether you choose to operate as a partnership, a limited liability partnership or a limited company is often a matter of tax. Partnerships offer more flexibility but companies and limited liability partnership have the benefit of limiting the liability of the shareholders (in a company) and the members (in a limited liability partnership.
If you choose to move forwards in partnership with others, you should ensure you have in place a partnership agreement which sets out how the profits and losses are shared between you and what happens if one of the partners want to retire or leave the partnership.
Limited Liability Partnerships (LLP)
An LLP is cross between a partnership and a limited company. Like a company, an LLP must be formed by application to, and registered at, Companies House and it must disclose information about itself on the public register, including details of its registered office, its members, its accounts and reports and its charges.
There are different types of membership status in an LLP depending on how much day to day control each member has with the running of the business. The members of an LLP enjoy limited liability up to the amount of any financial contribution to the LLP.
An LLP is taxed like a partnership which, depending on your own circumstances, may make an LLP an attractive business vehicle. Also like a partnership, you must have a minimum of two members for an LLP to exist.
If you do choose an LLP, then you will need an LLP Agreement which sets out the relationship between the members of the LLP. It covers many of the same areas as a partnership agreement and a shareholders’ agreement. The agreement will set out the duties and obligation of the different types of members, their share of the profits and losses and provisions for what happens when a member wants to exit the LLP. A member is likely to have accrued a capital account which the LLP is obligated to pay back to them when they leave. The LLP agreement can set out the time period over which payment is made and the frequency of the payments. Without these details a debt is created which can be called in on demand.
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