Legal structures: the basics
Partnerships
There are three types of partnership:
- 'ordinary' partnerships
- limited partnerships
- limited liability partnerships (LLPs)
Common features of all types of partnership
All three types of partnership have the following features in common:
- two or more persons – ie the partners - share the risks, costs and responsibilities of being in business
- a partner can be an individual or another business, eg a limited company or another partnership
- each partner takes an equal share of the profits, unless the partnership agreement states otherwise
- income tax and Class 4 National Insurance contributions are deducted from each partner's share of the profits
- each partner must register as self-employed with HM Revenue & Customs (HMRC) and complete an annual self-assessment tax return
- a nominated partner must also send HMRC a partnership return
- partners raise money for the business out of their own assets and/or with loans
- the partners themselves usually manage the business, although they can delegate certain responsibilities to employees
- it's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it from day to day
- the partnership must keep records showing business income and expenses
It's a good idea to draw up a written agreement between the partners. For further advice, consult an accountant or solicitor.
'Ordinary' partnerships
An 'ordinary' partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved - although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together.
However, partners are jointly liable for any debts owed by the partnership and so are equally responsible for paying off the whole debt.
Creditors can claim a partner's personal assets to pay off any debts - even those debts caused by other partners.
If a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership.
Therefore, partners do not enjoy any protection if the business fails.
Limited partnerships
A limited partnership is made up of one or more general partners and one or more limited partners.
General partners are jointly liable for any debts owed by the partnership and so are equally responsible for paying off the whole debt.
A limited partner's liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.
Limited partnerships must register with Companies House but don't generally have to make an annual return or file accounts.
Registration is via a paper application form only.
Limited liability partnerships (LLPs)
LLPs must have a minimum of two designated members - the law places extra responsibilities on them.
If for any reason the number of designated members falls to one, every member is deemed to be a designated member.
LLPs must:
- register with Companies House
- send Companies House an annual return
- file accounts with Companies House
You can register either via a paper application form or electronically using a third party with access to the necessary software - eg an incorporation agent, software provider or solicitor.
You can also send your annual return and other documents to Companies House electronically using its Webfiling service.
A partner's liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.
This means that members have some protection if the business runs into trouble.
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