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Analysis of Different Types of Partnership
In this assignment I am expected to analyse different types of Partnership. During this I would be explaining and evaluating those types of partnership and be able to advise my clients which one is the best one for someone starting a business for the first time and also be able to states all the benefits of each type of business structure.
According to the classic definition of partnership provided by s.1 of the Partnership Act 1890 is:
“Partnership is the relation which subsists between persons carrying on a business in common with a view to profit." Partnership is an incorporated body which means that the partnership does not have a separate legal personality from the partners. In the eyes of the law the partners is the business. If one partner make a decisions regarding the partnership and it goes wrong all partners are liable, they all can end up personally bankrupt because their personal assets can and will be used to pay the partnership debts. In another hand if one partners become personally bankrupt the creditors can be entitled to his or her share of the partnership. This is why it is important to have a partnership agreement where the partners can ensure themselves against bankruptcy of individual partners. In the deed they can specify the outcome of any undesirable eventuality. It is the partnership agreement that rule the partnership. In case of no partnership agreement there is the Partnership Act 1890.
The Act does not state any formal decision making structure of the partnership. According to the act a partnership does not requires one. The partners can set out the partnership agreement according to their needs. Usually the partnership deed is used to stipulate the dos and don’ts of the partnership and to delegate or retain the power and responsibility of the partners. It has to cover all eventualities, such as who owns the partnership premises; how new partners are to be taken in, and how they are to be paid; retirement of partners; circumstances in which a partner may be removed from the partnership
Partners’ relationship must always be of the business’s best interest. It is very different from the relationship between employer and employee. Partners are business owners depend on their shares is the partnership which give them a number of co-existent rights. They have the right to take parts on decisions that affects the business; they have the rights to share profits and losses according to their shares on partnership; the rights to examine the accounts, to veto in the entrance of new partner and all partner are at liberty to the good faith of the other partners unless specified otherwise in the partnership deeds.
There are three types of partnership: The general partnership, Limited Partnership and limited liability partnership.
In general partnership all partners are liable for all debts of the business at the same proportions that they have in profits. The income and expense is reported on a separate return for tax purposes, but each partner then reports his or her pro-rata share of the profit or loss from the business as one line on his personal tax return. The most common form of partnership are group of people of the same family working together like a family plumbing firm and in another hand there are often group of professional people who work individually but have the benefit of shared support services like a firm of solicitors, doctors and accountants.
It is also very common for people to work in informal partnerships with no formal partnership agreement which often can lead into pretty serious situation if the partners enter in disagreement. Most of the time partners do not realise how often a partnership that start very good between friends can end up badly and in that case the partners can not just leave and go separate ways. In order dissolve the partnership the partners have to reach an agreement concerning the partnership property. Any partnership has properties sometime called intellectual property. The assets accumulates on partnership can be from work-in-progress to customers lists, service records, domain names, web sites etc. All things that may not considered valuable for some partners but when business is concern is a common property and in case of liabilities the partners will be still liable until the partnership is properly dissolved bills paid and profit shared.
Other important point in a partnership is the choice of a name. The partnership can be run under the partners’ surnames with or without forenames or initials. If partners decided to operate under a business name, the name has to comply with the Business Names Act 1985. The Act state that the partnership can not use names that suggests association with central or local government or that has national or international connections or is associated with specific bodies such as building societies unless the department of trade and industry consent to it. In order to make sure that there is no similar name in the market it is advisable to check local yellow pages directory, the index company names and the trade marks index before adopts the business name.
Partnership finance is all the money input by the partners. If the partners wish to increase the amount of money in the partnership they can take loans but to secure the loan they have to use partnership property or give personal assets as guarantees.
When conducting a partnership business all partner are agents of his co-partners and the partnership. Any partner when acting as an agent can bind his fellow partners and the partnership to any contract even if not authorised to enter the deal. And if a partner commits a tort in the course of the partnership business all fellow partners would be liable for his actions.
The other type of partnership is a limited partnership and limited liability partnerships. A limited partnership is set up under the light hand of the Limited Partnerships Act 1907. It is a partnership between two or more people where one or more party has limited liability or is not liable beyond his partnership capital.
This is different from the usual full liability partnership. If Mrs Jones and Ms Smith want to be in a limited liability partnership they can simply create a business and a partnership can be set up between Mrs Jones, Ms Smith and the business SmiJones Design Ltd. Mrs Jones and Smith can be the limited partners, leaving SmiJones Design Ltd as a general partner with the unlimited liability. Provided the partnership had no assets of real value, Mrs Jones and Ms Smith’s assets would be safe in the event of failure of the business conducted by the partnership - whatever it was. Apart from it a limited partnership operates in the same way as any other traditional partnership.
A limited partnership does not operate as a legal person. It cannot contract or sue or be sued or hold property. It operates within precisely the same legal framework as a conventional partnership. A limited partnership is not the same as a limited liability partnership, regulated by the Limited Liability Partnerships Act 2000. There is no legal obligation to have a formal written document, but an agreement is essential to set out the responsibilities of the partners. If there is no agreement, or the agreement is silent on an important point, then the formal default provisions of the Partnership Act 1890 apply.
Limited partners may not draw out or receive back any part of their contribution to the partnership during its lifetime or take part in the management of the business or have power to bind the firm. If they do, they become liable for all the debts and obligations of the firm up to the amount drawn out or received back or incurred while taking part in the management, as the case may be.
With a limited partnership, each of the general partners has unlimited liability for the debts of the partnership, but the limited partner's exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.
Individual or a legal body such as a company may be a partner in a limited partnership, either as a general or as a limited partner. A person cannot be both a general and a limited partner at the same time. They are also just partners not employees. Money earned in the partnership business is taxed in accordance with the rules for taxation of partnerships. Partners are considered self employed and they must be registered. A limited partnership must be registered under the Limited Partnership Act 1907. To register, you must deliver a statement Form LP5, signed by all the partners, to The Registrar of Companies House.
The partnership will only operate as a limited partnership after its registrar. If the business started before the registrar is complete it is considerate a general partnership with both the general and limited partners equally responsible for any debts and obligations incurred. It is advisable to register immediately after the partnership agreement has been signed. Because a limited partnership has to be registered, it is imperative to choose a name and the name must be acceptable to the Registrar. It is advisable to avoid at all cost any name that may be confusing or misleading. As a matter of prudence, avoid any name which is the same or similar to any other trade name.
A limited partnership may not normally consist of more than 20 persons. However, under section 717 of the Companies Act 1985 there are a number of exceptions to this rule. They relate almost exclusively to professional partnerships like doctors, accountants or solicitors. A limited partnership has no special provisions. Only information to be published is the information required by Form LP6 and if any alteration occurs after registration the registrar has to be notified of the change on Form LP6 within seven days.
In case of dissolution of a limited partnership only the general partners must wind up its affairs unless the court orders otherwise. Limited partners do not have the power to dissolve the partnership. Usually the limited partnership dissolution is stated on the partnership agreement or it can be stated by the court by creditor’s request. The partnership agreement usually states the action to be taken in case of debt or death of a limited partner. The fact that a limited partner is a 'person of unsound mind' is not a ground for dissolution of the partnership by a court, unless the person's share in the partnership cannot be otherwise ascertained and realised.
It is the general partner’s responsibility for the delivery of Forms LP5 and LP6 even if the preparation of the documents is delegated to an accountant or to an employee. In case of failing to do so will results on penalties for defaults in carrying out the requirements states by The Limited Partnership Act 1907. It is possible to change the status of partners between general and limited partners but only if the circumstances required the change. If the general partners change his status to limited partner it had to be advertised in the London, Edinburgh or Belfast Gazette depend where the case is. If a share of a limited partners change to someone else this transactions need to be advertised in the Gazette because the transaction has no effect until the publications.
Every partner is an agent of the limited partnership. This is protected by the law of "ostensible authority" present in the Partnership Act 1890 and in the Limited Partnership Act 1907. The limited partnership is bound by every contract made by any partner unless the partner had no authority to make the contract and the third party was aware of that fact. The limited partnership is bound even by contracts by former partners, unless the other party has been told that the former partner is no longer a member and the registrar has received a notice of this transaction.
Another innovation that brings the partnership closer to company is the introduction of the Limited Liability Partnerships Act 2000. After this act there is no longer the contrast between partnership and company. With this act partners can benefits with the protection of limited liability that directors of limited companies have. Limited Liability partnership still have the organizational flexibility of general partnership and as far as taxes is concern the partners are similar to traditional partnership but in many other aspects it is appropriate to think of them in terms of the company model. The creation of Limited Liability partnership requires a submission of an incorporation document to Companies House and there is no require of a partnership deed even though it is advisable to have one in order to regulate and protect the interests in the event of a dispute. It is only considered a LLP after the formality of incorporations are complete. An LLP is a corporate with his own identity. Partners in an LLP will have full entitlement to limited liability. The only exception is when the LLP continuo to trade after being reduced to just one member, which eventually, the remaining partner will become jointly and severally liable with the LLP. In case of insolvency of a LLP partners are only responsible for the amount of capital invest in the partnership. Unlike partnership an LLP is required to file an annual return and audited accounts. Like partnerships and LLPs is an organization for profit. An LLP is not suitable for charities.
In general partnership the partners is the entity of the partnership but an LLP has his own independent identity because when registered at company house it acquire his own birth certificate. This difference is visible when in an LLP every partner is an agent of the LLP itself but not of the other partners.
Partnership is a particular type of contract. Every partner in a partnership has contractual obligations to his partner. If breached it is subject of the common law and equitable principles. The major consequence of entering into a partnership is that the partners owe a fiduciary duty to one another. Since the law of fiduciaries and constructive trusts is a creature of equity and the categories of equity are never closed it is impossible to provide a comprehensive and definitive list of such duties but a number of clear principles have emerged. The partners owe one another a duty of good faith. Partner must deal honestly and openly with his fellows and disclose all relevant information to them. A failure to disclose is a breach of this duty; there is no need to establish fraud. This is also partly embodied in statute. Section 28 of the Partnership Act 1890 provides: “Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives." The principle in s.29 of the Act state that the partner must not make any unauthorised personal profit in any circumstances, therefore any benefit derived by partners without the consent of the other partners from any transaction concerning the partnership or involving the use of partnership property has to be declared. A trustee must not profit from his trust and this applies to partners as fiduciaries. An example of this is the case of Keech v Sandford where state that partners cannot obtain benefit as a result of their position and he must not put himself in a position of conflict of interest and duty toward his partners principle also states in by s.30 of the Act which provides that where a partner has carried on a business of the same nature and in competition with the partnership, he must account to the other partners for the profits of that business. As we see partnership is a type of contract and the partnership deed is considered a written terms and if there is no partnership deed those imposed by the Act can be varied by express or implied agreement.
In an LLP there is designated partner. A designated member is either an original member, or someone who is notified to the registrar as being a designated member. In any case a designated member is a partner and he ceases to be a designated member as soon as he stops being a partner. The limited liability partnership may give notice to the registrar that every partner and future partner will be a designated member. It is a designated member’s responsibility for certain administrative and filing duties and for the filing of accounts as well as other duties in particular circumstances. The designated member is held liable for the correct filing and recording of the limited liability partnership affairs and he will be subject to the criminal penalties if failure to comply. In small partnerships all partners are usually designated partners. The designated partners are specified in the incorporation document, if not the registrar has to be notified later to the same effect. There must be at least two designated partners in a partnership. It is also important to notify the registrar of any changes when a designated partner leaves or join the partnership. The partnership must notify the registrar within fourteen days of the appointment or retirement of a member or designated member and the registrar must be notified within twenty eight days of a change in the name or address of a member. Failure to comply with the filing provision carries liability.
The law of ostensible authority applies to partner transactions. Every partner is an agent of the limited liability partnership. The limited liability partnership is bound by every contract made by any partner, unless first, the partner had no authority to make the contract and second, the third party was aware of that fact. The limited liability partnership is bound even by contracts by former partners, unless the other party has been told that the former partner is no longer a member, or the registrar has received a notice to that effect. The profits of the business of a limited liability partnership are taxed in the same way as traditional partnership. The members of LLP are charged to Capital Gains Tax in the same way as traditional partners in a partnership and the Inheritance Tax Act 1984 has been amended to provide that the partners and partnership assets of a limited liability partnership are treated in largely the same way as those of a traditional partnership.
In LLP the partners own the fiduciary duties to one another. The core obligation of a fiduciary is that of single-minded loyalty to his principal and it is represented by several separate duties or restrictions like all partners need to act at all times in good faith; They must not misuse the money or property of the LLP, They cannot put himself in a position of conflict of interest with the LLP, partners cannot hold back any relevant information and cannot compete with the LLP. Unless expressly and properly excluded by the LLP agreement the fiduciary obligations will exist or it is clear from a consideration of all the circumstances that particular duties are inapplicable."
A partnership is a trading entity made up of a number of individual people known as members. In insolvency there is no protection for the partnership individual members as in a limited liability company. The individual partners or members are fully liable for the partnership debts if the partnership cannot meet them.
Joint and Several Liability implies that all members are liable for the partnership debts in full or in part individually, dependent usually on their ability to pay. As a results creditor can chase the members with the assets to satisfy the debts until all debts are liquidated or until all partners are bankrupt.
Trading as a partnership can carry some tax rewards and other benefits but if anything go wrong the partnership becomes insolvent or an individual partner becomes insolvent a partnership can be very hard to deal with.
Joint and several liabilities is a form of liability that is used in civil cases where two or more people are found liable for damages. The winning plaintiff in such a case may collect the entire judgment from any one of the parties or from any and all of the parties in various amounts until the judgment is paid in full. In other words, if any of the defendants do not have enough money or assets to pay an equal share of the award, the other defendants must make up the difference. The same thing apply to partners
Joint and several liabilities can also occur when members in a marriage like husband or wife or members of the same organization that owes taxes to the government like income taxes. In such cases, the revenue service may collect on the debt from any and of all the debtors. In a contractual situation, where two or more people are responsible or liable for the terms of the contracts and default on their obligations others or all parties can be hold liable for damages resulting from the breach of performance.
The Limited Liability Partnerships Act 2000 does not enforce a structure for the management of Limited Liability Partnership. There is no statutory provision for general meetings, directors, secretary because in the existing common law of partnership all these matters should be state at the partnership agreement which all partnership are advised to have one drawn up.
Unless the partnership agreement states otherwise, a partnership is dissolved by one partner giving notice to the others of his intention to dissolve the partnership or it can happen automatically by the death or bankruptcy of one partner. In order to avoid such inconvenient it is best for all partners to sign a partnership agreement. It also can happen when all partners reach an agreement to dissolve the partnership. Other way that the partnership can be dissolved is when something happen that makes the partnership unlawful for the business or for the partners to carry on the partnership The partnership can reach and end if the partnership was a made for a reason that no longer exist for example a single event or if the partnership has a limited time e.g. an expiry date. A partnership can also be dissolved without notice by the death or bankruptcy of any partner or by Order of the Court.
In case of dissolution partners are bound to make available to the other partners or their legal representatives true accounts and full information about matters affecting the partnership.
If a partner has assigned his interest in the partnership the assignee is not entitled to interfere in the management or administration of the partnership business, or affairs or to require production, or inspection of the partnership books. The assignee is only entitled to receive the share of the profits the assignee partner would have received.
When a partnership has been dissolved the first think to do is to settle any debts, losses and all the responsibilities in the partnership before share any capital between partners in the proportion of their entitlement in the partnership. The debts and liabilities need to be paid first to people outside de partnership for example the creditors. After all the liabilities have been made the partners are entitled to their capital invested. If any balance remains it is considerate profit it should be divided between the partners in the proportion that they are entitled in the partnership.
In case of existence of a partnership agreement the procedures of the dissolution of partnership is usually in writing in the partnership agreement which prevent the partner from having any disagreement. In that case the procedure to follow is what is previous agreed between partners. In any case no profits or capital should be shared before all the payments and liabilities of the partnership been paid. In any omission the Partnership Act 1890 also imposes certain liabilities on partners and if the partners wish to avoid such liabilities they must specify in the partnership agreement.
Because partners are agent of the business and of the other partners in the partnership they are considered liable of any action that will bind the business and the other partners if it is carried out in the usual course of business if they are authorized to do so. If they are not authorized to do so and the third party do not know about it the partnership would still be liable because the third party would claim to be acting in good faith. The business would be responsible for making up the loss if a partner receive money or property in the name of the business in a dishonest and wrongful way. The court can order payment from the partner's share in the partnership property and profits and can also give creditors permission to take share of the profits as a payment.
Any property, work in progress, client list and other rights or interests which are originally or subsequently brought into the partnership are considered to be partnership property and are to be used by the partners exclusively for partnership purposes. Any property bought with partnership money will be taken to have been bought for the business.
A partner who can be a person or a company, which is known as a corporate member, are usually personally liable and in general partnership is without limit for the debts of the partnership. So in case of debts creditors of a partnership can request payment from one or all of the partners and from the partnership itself. Because of liability that partners have for the debts of the partnership, it can be wound up and bankruptcy orders can be made against the individual partners if they do not pay all the debts.
A creditor of the partnership can apply for the winding up of the insolvent partnership as an unregistered company with no action taken against the individual partners under Article 7 of the Insolvent Partnerships Order 1994 or he can apply for the winding up of the insolvent partnership as an unregistered company with the petition for bankruptcy against one or all the partners under Article 8 of the Insolvent Partnerships Order 1994. Creditors can only apply for a winding-up order against the partnership if the partnership has traded in England or Wales at any time in the 3 years before the petition is presented. A creditor can also apply for the bankruptcy of the partners without petitioning to wound up the partnership.
The petition for the winding up can also be made by the partnership. The petition for the winding up of the partnership as an unregistered company can be made with or without bankruptcy petitions presented against the individual partners as state under article 9 and 10 of the Insolvent Partnerships Order 1994 or under article 11 of the Insolvent Partnerships Order 1994 known as a Form 16 the petition for Bankruptcy orders to be made against all the partners. This petition must be presented jointly by all the partners the partners must be individuals. If one or more partners are corporate member the petition must be presented under Article 10 of the Insolvent Partnerships Order 1994
A formal winding-up order is not made against the partnership but any order made as a result of a Form 16 petition will include authority for the partnership to be wound up by the trustee appointed to deal with the bankrupt partners affairs. If a bankruptcy petition has already been presented against one of the partners, and the court is made aware of the insolvent partnership, the court may make an order regarding how the partnership affairs should be dealt with. As the partners are personally liable for the debts of the partnership, an individual partner can apply for bankruptcy without applying for the partnership to be wound up.
If a winding-up order has been made against the partnership, the partnership affairs are dealt with in the same way as a limited company. It does not really matter what is the form of the business, partners will need for follow an organized plan for settling and distributing its assets. The plan may have to follow guidelines state in the insolvency act, 1986 and may also have to report the settlement and distribution to tax authorities the HM Revenue & Customs:
Still on the subject of bankruptcy, neither a trustee nor any creditor can automatically become a partner under any circumstances. The worst case with no partnership agreement is that they could force a sale of the partnership assets to raise enough cash to pay out the bankrupt partners share. In fact the most likely outcome, even in such horrible circumstances is that the trustee is persuaded to accept less money which in that case would be a bonus to the remaining partners. This event is unlikely but probable.
In a partnerships after all contracts and obligations are completed. All the property and assets are evaluated at the same value shown at the balance sheet in the last month before dissolution. Creditors are paid from partnership assets which includes partners who are creditors. If partnership assets are insufficient, liabilities are paid by the partners in proportion to their shares in the partnership. If any of the partners are insolvent, or otherwise unable or unwilling to pay, the liabilities are paid by the remaining partners in proportion to their shares in the partnership. The costs of winding up the partnership are paid. A contingency fund is set aside for the purpose of paying any taxes or liabilities that arise following dissolution.
The remaining partnership assets are distributed to the limited partner’s shares of profits and interest on capital at the proportion to original investment. Return of capital investment to the limited partners. Return shares of profits and interest on capital usually in a proportion of investment. Return of the investment capital to the general partners. Each partner executes whatever documents are necessary to transfer property allocated to other partners.
I do not know why limited partnerships have not been used more widely. They provide a simple shelter against liability for one partner. I advised my clients to form a Limited partnership. Consider this scenario: In a limited partnership between Mrs Jones, Ms Smith and Smijones Design Ltd, only Smijones Design Ltd which is a company is a general partner. The two individuals are limited partners. The partnership engages in clothes design and manufacturing and incurs liabilities it cannot meet. Only the general partner is liable. It may have no assets. The estates of the two general partners are safe. To preserve the limited liability status, neither Mrs Jones nor Ms Smith may take any part in the management of the partnership. However, Ms Smith is a director of Smijones Design Ltd, the general partner, so she is exceedingly well informed with regard to the business of the limited partnership. The shares in which profits are divided may be changed from time to time, to suit the taxation obligations of the partners. To be truthful I think that most, if not all business started as a sole trade or sole Proprietorship. A sole proprietorship is one person alone. He or she will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on his or her personal income tax return along with all other income and expense he or she normally reports although it will be on a separate schedule. Although proprietorship avoids the expense of forming a partnership or Company, many start businesses this way because they are unfamiliar with the other forms of organizations. And I believe that person who started business straight away as corporation companies is because he or she already belongs or belonged to a partnership or sole trader before and already have the experience and the knowledge of business. After the limited partnership the best one of Partnerships is the Limited Liability Partnerships Act 2000 created an additional category of partnership. Nevertheless the limited partnership only worked in this scenario if Ms Smith and Mrs Jones already have a company form which very unlikely if they are new in the business career. In this case it is best for them to form a equal partnership where all of them has the same liability, where they invest the same amount of money and see where it leads.