Introduction to partnerships – a historic and evolving business structure

Partnerships have long been an integral thread in the business composition of the UK private sector.

According to the government’s estimate of the 2025 business population, one of the three most common business structures was a general partnership (“GP”).

In addition to general partnerships, there are two other common forms of partnership structure – limited liability partnerships (“LLPs”) and limited partnerships (“LPs”). This article provides a brief overview of the main types of partnership structure, with a particular focus on ordinary partnerships and LLPs.

1 – General partnerships

A GP is an unusual business structure because it can come into existence accidentally – it is irrelevant whether the partners themselves identify their business as a partnership.

If your business meets a statutory definition, it is legally classified as a GP. The definition is: “the relation which exists between persons carrying on a business in common with a view to profit”.

This definition comes from section 1 of the Partnership Act 1890 (“PA 1890”). It follows, and is important to note, that it is the PA 1890 which will govern the GP structure and relationship between the partners.

This can lead to complications and disputes during the lifetime of the GP. For example, under the PA 1890:

• partners are entitled to share capital, profits and losses equally, regardless of their role or involvement;
• partners are required to take an active role in the management of the partnership; and
• the death of a partner ends the GP.

It is consequently always recommended that a partnership agreement be put into place so that the relationship and responsibilities between the partners in a GP can be reflective of their practice and intention.

Another key point to consider regarding GPs is that they have no separate legal personality of their own. It is therefore crucial to consider what is “partnership property” and what belongs to individual partners. For example:

• unless it is made clear otherwise, partnership property will be considered jointly held by the partners as trustees for the partnership;
• in the case of an insolvent partnership, partnership assets will be applied to the GP’s creditors in the first instance (and, because the GP has no separate legal personality, creditors can then pursue any unpaid balance against the individual partners’ estates); and
• accountancy and tax consequences can come into play – if a partnership asset increases in value, that increase belongs to the partnership. If the asset is owned by an individual partner, the increase belongs to the individual.

The determination of which assets belong to the partnership and which belong to individual partners is often set out in an GP’s accounts, however, it is recommended that it be laid out more clearly within a partnership agreement.

2 – Limited liability partnerships (“LLPs”)

LLPs were established by the Limited Liability Partnerships Act 2000 (“LLPA 2000”). The purpose of introducing a new form of partnership was to allow businesses to continue to benefit from the flexibility offered by a partnership structure, while also protecting members’ personal assets from the business’s debts and liabilities.

A primary difference between LLPs and GPs is that LLPs must be incorporated. The requirements for incorporation are listed in the LLPA 2000 and the Companies Act 2006 (“CA 2006”). The process for incorporating an LLP is similar to that of a company and involves registering the LLP with Companies House and submitting the key incorporation documents.

Once incorporated, an LLP has a separate legal personality from its members. This means that the LLP is legally distinct from the individuals who own and operate it. Unlike a GP, an LLP can own property, enter into contracts and incur debts in its own name. The LLP’s assets belong to the LLP, rather than to its individual members.

This distinction can make the ownership of business assets more straightforward. For example, property acquired for the purposes of an LLP’s business will generally be owned by the LLP itself. It is therefore not necessary to determine whether the property is held jointly by the members or by one member on behalf of the business, as may be the case with a GP.

The separate legal personality of an LLP also affects liability. The members are not generally personally liable for the LLP’s debts simply because they are members. Instead, the LLP is responsible for its own liabilities. This provides an important layer of protection for the members’ personal assets, although it does not provide absolute protection in every circumstance. For example, a member may remain personally liable for their own wrongful acts, or where they have given a personal guarantee.

An LLP must have at least two members. Members may be individuals or corporate bodies. At least two members must be designated members (a role broadly equivalent to a company director) who are responsible for performing certain administrative and filing obligations. These obligations include ensuring that the LLP’s accounts and confirmation statement are delivered to Companies House.

The relationship between the members of an LLP is governed primarily by the LLP agreement. The LLPA 2000 provides a framework for LLPs, but the members have considerable flexibility to agree how their LLP will operate. The LLP agreement will commonly address matters such as:

• the members’ capital contributions;
• how profits and losses will be allocated;
• members’ roles and responsibilities;
• voting and decision-making arrangements;
• the admission of new members;
• retirement, expulsion or removal of a member; and
• what happens if the LLP becomes unable to continue operating.

If there is no LLP agreement, the default provisions of the LLPA 2000 apply. These provisions may not reflect the members’ actual intentions or the way in which the business operates. It is therefore important to put an LLP agreement in place at an early stage and to review it when there are significant changes to the business or its membership.

3 – Limited partnerships (“LPs”)

An LP must have at least one general partner, who manages the business and has unlimited liability, and at least one limited partner, whose liability is generally limited to the amount contributed to the partnership. Limited partners must not take part in managing the business if they wish to retain that protection. LPs are commonly used for investment structures, rather than businesses in which all partners are actively involved in management.

If you are interested in setting up a GP or incorporating an LLP, please do get in touch.