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Choosing the right partnership structure is crucial for any business venture. Each form offers distinct advantages and disadvantages, impacting your personal liability, taxation, and management flexibility.

Under English law the main options are:

General Partnership

This is the simplest form, easy to establish without complicated formalities.

Under the Partnership Act 1890 unless agreed otherwise:

• Unlimited Liability: Partners are personally liable for all partnership debts, even beyond their investment.
• Management: All partners have equal rights and responsibilities in decision-making, potentially leading to slower processes.
• Profit & Loss Sharing: Profits and losses are shared equally regardless of individual contributions.
• Taxation: Each partner reports their share of profits and losses on their personal tax return.

Limited Partnership (LP)

Very rarely used except in investment circumstances such as Private Equity and Venture Capital. Government reviewing the 1907 Act regarding transparency.

• Two types of partners: General partners manage the business with unlimited liability, while limited partners contribute capital with limited liability (up to their investment).
• More complex setup: Requires registration with Companies House.
• Management: General partners make key decisions, while limited partners have limited voting rights.
• Profit & Loss Sharing: Defined in the partnership agreement, offering flexibility but potential for disputes.
• Taxation: Similar to GPs, individual partners report their share of profits and losses.

Limited Liability Partnership (LLP)

• Combines limited liability with flexibility: Offers limited liability for all partners, similar to a limited company.
• More formal setup: Requires registration with Companies House.
• Management: Partners manage the business through internal rules and agreements governed by an LLP Agreement.
• Profit & Loss Sharing: Defined in the partnership agreement, offering flexibility but potential for disputes.
• Taxation: Similar to GPs and LPs, individual partners report their share of profits and losses.

Other business partnership structures include joint ventures which are a collaboration for a specific project, often governed by a joint venture agreement usually between two companies either as a form of “partnership” or as a company comprising the two corporate shareholders.

Choosing the Right Structure

The best structure depends on your specific needs and priorities. Key considerations will typically include: –

• Liability protection – how much risk are you willing to accept personally?
• Management style – do you prefer a democratic or hierarchical approach?
• Complexity and cost – are you comfortable with more formal structures and their associated costs?
• Taxation – understand how each structure impacts your tax obligations.

The importance of a written agreement

While not mandatory, a written agreement is crucial for protecting your interests and clarifying roles, responsibilities, and expectations. Without one, the Partnership Act 1890 (in the case of a partnership) or company law (in the case of a corporate JV) will automatically apply, potentially leading to unforeseen issues and disputes.

What happens without a Partnership Agreement in the case of a partnership?

• Unclear Profit & Loss Sharing – profits and liabilities are split equally, regardless of individual contributions.
• Unlimited Liability – Partners are personally liable for the partnership’s debts, potentially risking their personal assets.
• No Defined Decision-Making – if there are only 2 partners and they can’t agree, deadlock is reached. If there are more than 2, absent an agreement, majority vote rules
• Unclear Exit Strategy and liabilities – no framework for dissolving the partnership or handling partner exits.

Key clauses in a Partnership Agreement

• Partnership details – clearly define the nature of the partnership, business objectives, and duration.
• Capital Contributions – specify each partner’s financial contributions and profit/loss sharing ratios.
• Roles & Responsibilities – outline individual roles, duties, and decision-making authority.
• Intellectual Property – determine ownership and exploitation rights for any intellectual property created.
• Dispute Resolution – establish a process for resolving disagreements within the partnership.
• Dissolution & Exit Strategy – define grounds and procedures for dissolving the partnership or individual partner exits.
• Confidentiality – ensure sensitive information remains protected within the partnership.
• Partner Entry – clearly address partner onboarding procedures, capital contributions, and voting rights.
• Partner Exit – define rules for exiting the partnership, including buyout options, valuation methods, and non-compete clauses.