Orr Litchfield

Solicitors and Business Lawyers

Setting up, managing and closing different types of partnership

This page provides information about the different types of partnership arrangements which exist under English law; and setting up, managing and closing partnerships and related matters. If you have any specific questions relating to partnerships, please contact us on +44 (0)20 3126 4520 or by email at enquiries@orrlitchfield.com

1. What types of partnership arrangements are there under English law?

Essentially, there are three different types of partnership under English law:

(a) General partnerships - See section 2 below.

(b) Limited partnerships - See section 3 below.

(c) Limited liability partnerships (‘LLPs’) - See section 4 below.

2. What is a general partnership?

General partnerships are more commonly simply referred to as ‘partnerships’, albeit that term is also often used generically to refer to all types of partnerships.

The law relating to partnerships was codified in the Partnership Act 1890. That Act remains in force. It is supplemented by the rules of equity and common law applicable to general partnerships.

Section 1 of the Partnership Act 1890 states that a “Partnership is the relation which exists between persons carrying on a business in common with a view to profit”. The Partnership Act 1890 sets out a series of rules for determining whether a partnership exists.

The existence of a partnership is a matter of fact. The parties cannot simply determine this for themselves. However, the partners will usually enter into a written partnership agreement, which sets out (amongst other matters) the rules relating to the commencement, management and dissolution of the partnership. It is important to remember that the essence of a partnership is the continuing relationship (personal as well as commercial) between the partners. Any written partnership agreement will only be an indication of the relationship. If a court has to consider whether a partnership exists, it will look at the substance of the arrangements and not the stated intentions of the parties.

A partnership must:

(a)    have at least two partners; and

(b)    be carried on "with a view to profit". It is the intention to make a profit that is important rather than whether a profit is actually made.

In view of the requirement of an intention to make a profit, charitable or not-for-profit concerns cannot be partnerships. However, they may be able to form partnerships with others.

3. What is a limited partnership?

A limited partnership is a partnership which is registered in accordance with the Limited Partnership Act 1907. As with a general partnership, a limited partnership must have at least two partners and be carried on with a view of profit.

In view of the requirement of an intention to make a profit, charitable or not-for-profit concerns cannot be limited partnerships. However, they may be able to form limited partnerships with others.

4. What is a limited liability partnership (‘LLP’)?

The law relating to LLP’s is governed by the Limited Liability Partnership Act 2000, which have been supplemented by the Limited Liability Partnership Regulations 2001 and the Limited Liability Partnership Regulations 2009 (and other more minor amendments). The latter applied the provisions of the Companies Act 2006 to LLPs with modifications.

An LLP is a form of partnership which is registered in accordance with the Limited Liability Partnership Act 2000 (as amended). As with a general partnership and a limited partnership, an LLP can only be formed with a view to making a profit.

In view of the requirement of an intention to make a profit, charitable or not-for-profit concerns cannot be LLPs. However, they may be able to form LLPs with others.

The partners in an LLP are referred to as ‘members’ in the legislation. In this article, we have simply used the term ‘partners’ for ease of reference.

5. What is a partnership agreement?

A partnership agreement is a contract which sets out the terms and conditions of the relationship between the partners in the relevant partnership. Where it relates to a limited partnership, it will be called a limited partnership agreement and where it relates to an LLP, it will be called a limited liability partnership agreement (or LLP agreement).

There is no statutory or other requirement for the partners in any of the types of partnership to enter into a written partnership agreement. The legislation relating to each type of partnership sets out default rules relating to the arrangements between the partners in the relevant type of partnership. However, it is frequently the case that the default rules set out in the legislation do  not reflect the way in which the partners wish their partnership arrangements to work in practice. By way of example, the partners may wish to alter the rules relating to new partners, the allocation of profits or the removal of partners.

A partnership agreement will set out the terms and conditions of the contract agreed between the partners. In most cases, it will be able to override the default provisions contained in the legislation relating to the relevant type of partnership.

Even where the partnership is a straightforward relationship between two partners who share everything equally, a partnership agreement should be prepared. This includes situations where close family members or friends are establishing a partnership. Ideally, the partnership business relationship will continue amicably without dispute or other problems. However, disagreements may occur. In such circumstances, it is useful to have a clearly written partnership agreement setting out the terms and conditions of the partnership (including any dispute resolution provisions) to help the partners to resolve any conflict quickly and efficiently.

It is important to consider the terms and conditions of a partnership agreement carefully and legal advice is recommended.

6. When should a partnership agreement be used by partners?

Whilst there is no statutory or other requirement for the partners in any of the types of partnership to enter into a written partnership agreement, it is recommended that they do so. This is because the default provisions are relatively simple in their nature and usually need to be supplemented or changed considerably to reflect the way in which the partners wish their partnership arrangements to work in practice.

A written partnership agreement will help provide certainty between the partners as to the way in which the partnership is conducted. In addition, partnership agreements are private documents. This means that the arrangements between the partners will be confidential (with most partnership agreements containing a confidentiality clause).

Ideally, a written partnership agreement should be entered into by the relevant partners prior to the commencement of the partnership business.

7. Is a partnership a separate legal entity from its partners?

This depends on which type of partnership is being established.

The Limited Liability Partnership Act 2000 provides that an LLP is a body corporate with a separate legal personality from that of its partners. However, neither general partnerships nor limited partnerships have a separate legal personality from their partners.

Separate legal capacity carries several advantages including   the ability for the legal entity to hold assets in it’s own name, create charges over its assets and enter into contracts in its own name. It also usually has the effect of limiting the liability of its owners.

8. Can a partnership enter into contracts?

This depends on which type of partnership is being established.

As an LLP has separate legal personality from its partners, it can do anything that a natural person can do. This includes entering into contracts in it’s own name.

General partnerships and limited partnerships do not have a separate legal personality from their partners. Accordingly, they cannot enter into contracts in their own names.

In the case of a general partnership, the partners will act as agents of the partnership and have wide authority to bind the partnership.

In the case of a limited partnership, the general partners will act as agents of the partnership and have wide authority to bind the limited partnership. However, a limited partner is unable to enter into contracts on behalf of the limited partnership.

It is common practice for partnership agreements to include contractual provisions relating to the management of the partnership, which may include provisions relating to the ability of partners to enter into contracts on behalf of the relevant partnership (whether it is a general partnership, limited partnership or LLP).

9. How do you set up a partnership?

The rules relating to the establishment of a partnership vary depending on which type of partnership is being established.

(a) General partnership – There are no formal filing or registration requirements. The existence of a partnership is a matter of fact. Section 2 of the Partnership Act 1890 sets out a series of rules for determining whether a partnership exists.

(b) Limited partnership – An application must be made to register a limited partnership at Companies House.

(c) LLP – An application must be made to register an LLP at Companies House.

A partnership does not require constitutional documents. However, the partners in each of a general partnership, a limited partnership and an LLP will usually enter into a written partnership agreement, which sets out (amongst other matters) the rules relating to the commencement, management and dissolution of the partnership.

10. What are the filing requirements for a partnership?

The filing requirements of a partnership vary depending on which type of partnership is being established.

(a) General partnership – There are no formal filing requirements on commencement or during the existence of the general partnership.

(b) Limited partnership – An application must be made to register a limited partnership at Companies House and there are limited on-going filing requirements. A limited partnership is not required to audit or file a copy of its accounts with Companies House unless it is a "qualifying partnership" under the Partnerships (Accounts) Regulations 2008. In addition, there is no requirement to file an annual confirmation statement. However, there is a requirement to notify Companies House of any change in the nature of a limited partnership.

(c) LLP – An application must be made to register an LLP at Companies House and there are limited on-going filing requirements. LLPs must prepare and file an annual confirmation statement and annual accounts.

11. How long can a partnership last?

It is good practice to set out the rules relating to the commencement, continuation and closure of a partnership in a partnership agreement including rules relating to the appointment of additional partners and the retirement and removal of partners.

In general terms, a partnership can be established to continue for a specified duration or until the occurrence of a specified event or to last indefinitely until it is dissolved.

12. How many partners can a partnership have?

There is no limit on the maximum number of partners for a general partnership, a limited partnership or an LLP. However, each form of partnership requires at least two partners. A partnership agreement may specify minimum and maximum numbers of partners, although there cannot be less than two.

The specific rules relating to the number or category of partners varies slightly depending on the type of partnership

(a) General partnership – There must be at least two partners.

(b) Limited partnership – There must be at least two partners with at least one being a general partner and at least one being a limited partner commencement or during the existence of the general partnership.

(c) LLP – There must be at least two partners (described as ‘members’ by the legislation) with at least two being designated members. If, at any time, the LLP does not identify at least two partners as designated members then all of the partners will be deemed to be designated members.

13. Does a partner in a partnership have limited liability?

The limited liability status of any partner in a partnership will vary depending on which type of partnership is being used and, in some cases, the category of partner.

(a) General partnership – All partners in a general partnership have unlimited liability.

(b) Limited partnership – All general partners in a limited partnership have unlimited liability. The liability of all limited partners in a limited partnership is limited. Limited partners are required to contribute capital or property to the limited partnership. They do not take an active role in the management or operation of the limited partnership. Any limited partner who takes an active role loses its limited liability. As a consequence of these rules, the general partner in a limited partnership is often a private limited company or other limited liability entity.

(c) LLP – All partners have limited liability. There are, however, some exceptions to this rule.

The partners in each form of partnership will usually enter into a written partnership agreement, which may include rules relating to partner capital contributions and other payments to the partnership in specified circumstances.

14. How are the profits and losses of a partnership shared by the partners?

The default position for each type of partnership is that the partners will share any profits or losses of the partnership business equally.

While the liability to third parties of a limited partner in a limited partnership and an LLP partner in an LLP is limited, they are still liable to bear their share of the trading losses of their respective partnerships from a tax and accounting perspective. 

It is often the case that the partners enter into a partnership agreement which sets out a different method of allocating the profits and losses of the partnership between the partners and the order in which different categories of partner will be paid. There are many alternative ways in which this may be done.  

15. How is a partnership taxed?

The key aspect of the tax treatment of English partnerships is that they are generally not treated as taxable entities for the purposes of English law because they are fiscally transparent.  This means that a partnership will not itself be taxed. See section 16 (How are partners in a partnership taxed on profits?)

16. How are partners in a partnership taxed on profits?

English partnerships are treated as being fiscally transparent and are not subject to tax on profits themselves – see section 15 (How is a partnership taxed?) above.  Instead, the partners in a partnership will be taxed on their profit share from the partnership.

In general terms, once the partnership's profits or losses have been computed they are allocated to each partner in accordance with the partnership's profit-sharing arrangement in the partnership agreement (or, in the absence of any partnership agreement or relevant clause, equally by default).

17. How is a partnership managed?

The rules relating to the management of a partnership will vary depending on which type of partnership is being used and, in some cases, the category of partner.

(a) General partnership – All partners in a general partnership manage the partnership business.

(b) Limited partnership – All general partners in a limited partnership manage the partnership business. If a limited partner participates in the management or operation of the partnership business then that limited partner will lose his limited liability status.  

(c) LLP – All partners in an LLP manage the partnership business. However, the partners who are appointed as designated members are required to deal with certain administrative tasks (for example, filing papers at Companies House and signing the annual accounts).

The partners in each of a general partnership, a limited partnership and an LLP will usually enter into a written partnership agreement, which is likely to include rules relating to the management of the relevant partnership.

The provisions in a partnership agreement relating to the management of the partnership can vary significantly depending on factors such as the type of partnership, the size of partnership, the purpose of the partnership, the roles of the relevant partners, the financial contributions of the relevant partners and the intended duration of the partnership.

A partnership agreement may appoint a senior partner, managing partner or management committee to deal with day to day partnership business management. It may also specify matters which require the consent of all or a specified number or percentage of the partners. It will also deal with matters such as the frequency of partners meetings, the notice required for such meetings and the way in which meetings will be conducted – these matters may vary depending on the circumstances.

18. Do partners have to make capital contributions to the partnership?

There is no statutory requirement for partners from any type of partnership to make capital contributions to their partnership except for the limited partners in a limited partnership.

The limited partners in a limited partnership have a statutory obligation to provide capital. However, that amount is limited to the amount that they agreed to contribute, which is often a nominal amount. A general partner in a limited partnership is under no statutory obligation to contribute capital to the limited partnership.

As (with minor exceptions) partners cannot be required to contribute capital to their partnership and (in general terms) the default provisions provide that partners share equally in the capital and profits (and losses) of the partnership, this issue is commonly dealt with in a partnership agreement.  

A partnership agreement will usually state the amount of a partner's fixed capital and set out rules relating to the payment of capital contributions by partners, adjustments to capital contributions (for example, to reflect additional sums introduced by partners or sums credited to partners by way of transfer from current account (where partners have decided to capitalise retained profits), and withdrawals and repayments of capital contributions. Partners may also decide to capitalise all or part of any increases in the value of assets of the partnership, in particular, in connection with the admission of new partners.

19. Can a new partner be admitted to a partnership?

All forms of partnership are able to admit new partners. However, the default rules relating to the admission of new partners to a partnership vary depending on which type of partnership is being used and, in some cases, the category of partner.

(a) General partnership – All partners in a general partnership must agree to the admission of a new partner to the partnership. If a new partner is admitted to a general partnership then the new partnership will be a partnership at will. A partnership at will may be dissolved at any time by a partner serving notice on the other partners. This issue can be overcome by including an appropriate clause in a partnership agreement which sets out the rules relating to the admission of new partners and the existing partners agree to be bound by its terms.

(b) Limited partnership – The Limited Partnership Act 1907 provides that the general partners in a limited partnership may admit a new general partner or a new limited partner to the limited partnership without the consent of the existing limited partners. In view of the risks associated with admitting new partners, it is common for limited partners to include an appropriate clause in a limited partnership agreement which sets out the rules relating to the admission of new partners. Typically, this will provide that all (or a specified number or percentage) of all of the partners (or of each of the general partners and the limited partners taken separately) must agree to the admission of a new general partner or new limited partner.  

(c) LLP – All partners in an LLP must agree to the admission of a new partner to the LLP. However, it is common for the partners in an LLP to include an appropriate clause in an LLP agreement which sets out the rules relating to the admission of new partners.

The partners in each of a general partnership, a limited partnership and an LLP will usually enter into a written partnership agreement, which is likely to include rules relating to the admission of new members to the relevant partnership. It is important that all new partners agree to be bound by the existing partnership agreement by a deed of adherence or similar document. Alternatively, the partners can simply enter into a new partnership agreement. The latter is more likely to occur in a smaller partnership due to administrative issues.

20. How can a partner retire or withdraw from a partnership?

The default rules relating to the retirement or withdrawal of partners from a partnership vary depending on which type of partnership is being used and, in some cases, the category of partner.

(a) General partnership – A partner in a general partnership has no right to retire from the partnership except with the consent of all of the other partners. However, where the partnership is a partnership at will, a partner may retire by giving notice under the Partnership Act 1890. Such notice will have the effect of dissolving the partnership.

(b) Limited partnership – The default rules relating to general partners and limited partners are different.

A general partner's right to retire is governed by ordinary law as the Limited Partnership Act 1907 does not contain any modification of the law. Accordingly, unless the limited partnership is for a fixed period, a general partner may give notice to retire from the limited partnership at any time. Such notice will have the effect of dissolving the partnership. A general partner may also effectively retire from a limited partnership by assigning its share of the limited partnership. The Limited Partnership Act 1907 provides that, a person may be introduced as a partner without the consent of the existing limited partners.

A limited partner may only assign its share in the limited partnership with the general partners’ consent.

The limited partnership must notify the Registrar of the retirement of a partner from the limited partnership or the assignment of any share in the limited partnership. A limited partner wishing to leave a limited partnership could seek an order for the dissolution of the limited partnership under the court’s general partnership jurisdiction.

(c)    LLP – In the absence of agreement with the other partners of the LLP about retirement or withdrawal from the LLP, a partner in an LLP may resign from the LLP by giving reasonable notice to the other LLP members. The retirement or withdrawal of a partner from an LLP does not give rise to any potential issues relating to the dissolution of the LLP (save where the number of designated partners falls below 2 in which case the LLP has 6 months to resolve the issue).

The partners in each of a general partnership, a limited partnership and an LLP will usually enter into a written partnership agreement, which is likely to include rules relating to the retirement or withdrawal of partners from the relevant partnership. This may include provisions relating to the notification process, limits on the number of partners that can retire within a specified period, the outgoing member's financial entitlements, confidentiality obligations and restrictive covenants. In relation to general partnerships and limited partnerships, it is also good practice to include provisions relating to the continuation of the partnership in order to minimise the risk of becoming a partnership at will with the prospect of dissolution.

21. How can a partner be expelled or removed from a partnership?

It is not possible to expel a partner from a general partnership, limited partnership or LLP unless there is a partnership agreement containing an express power of expulsion. Where there is no partnership agreement or the partnership agreement does not contain an express power of expulsion then it may be that the only way forward is to:

(a) Reach an agreement with the partner whom the partnership wishes to expel pursuant to which the partner will leave the partnership, or

(b) Apply to dissolve or wind up the partnership. The court may or may not grant the application.

The partners in each of a general partnership, a limited partnership and an LLP will usually enter into a written partnership agreement, which is likely to include rules relating to the expulsion of partners. An exclusion clause should include the grounds for expulsion, identify who decides whether a partner should be expelled, and set out the decision-making procedure.

22. Do partners owe each other a duty of good faith?

The partners in a general partnership and a limited partnership owe each other a duty of good faith in relation to the partnership business. This includes a duty of honesty and a duty not to use powers which are conferred as a partner for their personal advantage.

In general terms, ordinary partnership law does not apply to LLPs. The Limited Liability Partnership Act 2000 does not indicate whether the relationship between the partners in an LLP is of a fiduciary nature. The Court has held that LLP members do not owe a fiduciary duty of good faith to each other unless such a duty is expressly stated in an LLP agreement.

It is good practice to set out the duties and responsibilities of partners in a general partnership, a limited partnership or an LLP in an appropriate partnership agreement. In the case of an LLP, the partners may decide to include fiduciary duties in the LLP agreement including a duty of good faith.

23. Should a partnership agreement include confidentiality and restrictive covenant clauses?

Whilst the partners in a general partnership and a limited partnership owe each other a duty of good faith in relation to the partnership business in addition to certain other fiduciary duties, it is common practice for the partners to enter into a partnership agreement which will include both confidentiality provisions and restrictive covenants in order to protect the partners and the business.

As it is unclear as to whether the partners in an LLP owe a fiduciary duty of good faith to each other, it is even more important to include such a duty in an LLP agreement together with confidentiality provisions and restrictive covenants.

The confidentiality provisions will usually prohibit the use of confidential information where it is not being used on partnership business (save in specified circumstances) and may include enhanced rights to obtain an injunction.

The provisions relating to restrictive covenants may seek to impose a variety of restrictions on partners during and after their involvement in the partnership. This may include such matters as restrictions on (a) soliciting clients, suppliers or staff; or (b) working for clients, suppliers or staff; or (c) competing with the partnership.

24. How can a partnership be dissolved or terminated?

Each type of partnership can be dissolved. However, the rules relating to dissolution vary depending on which type of partnership is being used and, in some cases, the category of partner.

(a) General partnership – The default rules provide that a partnership is dissolved when a partner leaves or joins the partnership. However, in such circumstances, the partnership business usually carries on under a new partnership arrangement. A general dissolution of the partnership (often leading to a winding up of the partnership) can be brought about by unanimous agreement, the exercise of an express power to dissolve the partnership in the partnership agreement, rescission of the partnership agreement for fraud or misrepresentation of one of the partners, the occurrence of an event specified in the Partnership Act 1890, or by the court on the application of a partner on one of the five grounds in the Partnership Act 1890.

(b) Limited partnership – The position is broadly similar to a general partnership. However, there are some differences including the following:

(i) The expiration of a fixed term (or venture) will lead to dissolution. Where a limited partnership is formed for a fixed term, the relevant term must be specified in Form LP5 on registration of the limited partnership.

(ii) The death, bankruptcy or mental disorder of a limited partner are not grounds for dissolution by a court (save in certain circumstances),

(iii) A general partner may dissolve a limited partnership by giving notice of his intention to dissolve it to the other partners but a limited partner cannot do so unless given a power to do so.

(iv) Where the sole general partner is an individual, subject to contrary agreement, their death or bankruptcy dissolves the limited partnership.

(c) LLP – An LLP is a separate legal entity from its partners. Accordingly, in contrast to a general partnership and (to a slightly lesser extent) a limited partnership, it will not dissolve automatically. Instead, active steps must be taken to terminate an LLP. There are two main options - striking off by the Registrar or winding up (voluntarily or compulsorily). A voluntary application to strike off the LLP can be made by a majority of an LLP's members, by both members if there are only two, and where there is only one member, by that member alone.

The partners in each of a general partnership, a limited partnership and an LLP will usually enter into a written partnership agreement, which is likely to include rules relating to the dissolution or termination of the relevant partnership.

25. How do partners resolve partnership disputes?

There are no specific default provisions relating to partnership disputes. Accordingly, in the absence of a partnership agreement containing dispute resolution provisions, any unresolved partnership dispute may be subject to Court proceedings.

Partnership agreements often contain dispute resolution provisions (such as mediation or arbitration) in order to try to enable the partners to resolve any disputes efficiently, amicably and privately.

 

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full Legal Notices on our website or contact us for further information.

This page reflects our view of the law at the date on which it was created or last updated. Whilst we aim to keep this information up to date, we do not do so on a regular basis.

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