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Entering a General Partnership? What You Need To Know
Choosing the right structure for your business can be challenging when you are first starting out but is a key decision for any business owner. The choice depends on multiple factors, and it is critical for you to consult with finance, tax and legal professionals to determine the best structure for you.
While limited companies are often a go-to when starting up a new business, another option you may consider is a general partnership.
What is a General Partnership?
A general partnership simply exists when two or more people carry on a business together with view to making a profit. While this may seem like a simple and easy way to structure a business, it comes with some significant responsibilities that must be carefully considered.
It is important to note that a general partnership can be legally created even if the individuals involved did not intend to or are unaware that they have created a general partnership.
How does a general partnership work?
In a general partnership, each partner contributes to the business, such contribution could be financial investment, expertise, assets, or time.
The profits of the general partnership are then shared between partners according to an agreed ratio, which is usually documented in a partnership agreement. If no partnership agreement exists, the default legal position under the Partnership Act 1890 ("PA 1890") is that profits and responsibilities will be split equally.
What are the formalities of setting up a general partnership?
Setting up a general partnership is relatively straightforward and often simpler than incorporating a limited company. With fewer formalities and less public information, this setup is ideal for some businesses.
However, there are important matters to consider when setting up a general partnership.
Whilst not legally required, a written partnership agreement is highly recommended to clearly define the roles, responsibilities and profit shares of the partners.
Why are Partnership Agreements useful?
Whilst the PA 1890 does provide a default set of rules that apply to general partnerships, there may be provisions you wish to amend to better suit the way you envisage your general partnership will be run.
This includes but is not limited to:
Non-compete clauses – Nothing in the PA 1890 prevents a partner from setting up a competing business after leaving the partnership. Where the partnership continues after a partner retires or a partner leaves the partnership it is important to consider placing restrictions on a former partner’s ability to compete.
- Expulsion of partners – It may be beneficial to set out circumstances where a partner can be expelled from the general partnership. The PA 1890 does not legislate for such matters.
- Drawings – It may be that you want to place a restriction on how much each partner can draw from the business to prevent the general partnership's funds being drained.
- Dissolution – Under the PA 1890 governing rules for general partnerships, death or bankruptcy of a partner will automatically dissolve the general partnership. You may wish to consider departing from this provision and provide that the remaining partners will automatically continue the general partnership upon buying out the deceased/bankrupt partner’s share.
- Profits and Loss – The PA 1890 states that the profits and losses of the general partnership are to be shared equally between the partners. However, you may decide that you want to change this to reflect the capital contribution each partner has made to the general partnership.
- Partnership property – Given a general partnership is not a separate legal entity, it cannot own its own assets. This means the partners will hold any property in their individual names on trust for the general partnership. It is therefore highly recommended to have provisions within a partnership agreement that make the intentions of the partners clear as to which assets they consider to be partnership assets and those they regard as personal assets.
What are the advantages and disadvantages of a general partnership?
| Advantages | Disadvantages |
|---|---|
| Unlike companies, general partnerships do not have to share detailed information with the public, such as holding a public register at Companies House, meaning sensitive business and personal details are kept more private. | Unlike limited companies, general partnerships do not have a separate legal personality, so it cannot own assets. As a result, partners may be personally liable for the debts and obligations of the general partnership, meaning a partner's personal assets can be at risk. |
| Creating a general partnership can be simpler and cheaper than setting up a limited company. There is less paperwork, fewer formal registration requirements, and administrative costs can be lower. | If one partner enters into a contract such as a loan agreement or even commits a wrongful act while acting for the general partnership, all partners can be held responsible. This risk cannot be underestimated – disagreements over decisions, finances, or ethics can become serious legal problems if you do not have a partnership agreement in place. |
| Subject to the provisions of the PA 1890. The partners can decide for themselves how they want to run the business. Partners are free to agree on profit sharing and decision-making structures that suit their business style. This flexibility is especially useful if the business needs to adapt quickly as it grows. |
How can we help?
Get in touch with us today by calling 0330 123 1229, sending an email via info@smithpartnership.co.uk or completing our contact form, to find out more about how we can help you with setting up a general partnership.
We also have offices across the East Midlands and Staffordshire with expert corporate and commercial solicitors, in Burton, Derby, Leicester, Stoke-On-Trent and Swadlincote.
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