Merely labelling a business relationship a “partnership” does not create a partnership in law if there is no business being carried on “in common with a view to profit”. Choosing the appropriate partnership structure for your business venture is important because it affects many aspects down the road such as legal protections and levels of taxation. It is also not a simple matter to change structures later.

There are three types of legal partnerships in the UK – Ordinary, Limited and Limited Liability and they each offer various advantages and disadvantages:

Ordinary Partnership

• A simple agreement between the parties, not a legal, formal structure but still requires registration.
• Should one partner leave then the partnership is dissolved but the business may continue outside of the agreement.
• Can become problematic if you do not have an appropriately drafted and up to date partnership agreement.
• Fairly flexible agreement made between the members and not restrained by a rigid legislative regime.
• Fiscal transparency means that the individual parties will be taxed directly. The partnership is not taxed on its profits.
• Sensitive details of the venture can remain completely private and there is no obligation to publish financial details.
• A disadvantage is that liability is unlimited and each party is liable for the whole of the liabilities of the venture.
• Any change to the identity of parties will entail a new partnership arrangement which can be an expensive and time-consuming process.

Limited Liability Partnership

• An LLP is treated as a partnership for tax purposes –each party will be taxed directly on its share of the profits and losses of the venture.
• The LLP itself is not taxed on its profits (provided it is carrying on a trade or business with a view to profit).
• Legislative framework for LLPs is not as comprehensive as for limited companies allowing greater flexibility
• Separate legal identity – benefits from a clear corporate identity both internally, in terms of a dedicated management and workforce, and to the outside world.
• The roles and responsibilities of LLP members are often not as familiar as the defined roles of directors and shareholders in limited companies.
• Limited liability may be undermined in practice by guarantees and security required to support external financing and third-party contracts.