In England, Wales and Northern Ireland, a partnership has no separate legal identity and is an association between 2 and 20 persons formed to carry on a common business with a view to a profit. Other than professional partnerships like solicitors and accountants, you can't have more than 20 partners in a partnership.
In Scotland, partnerships are treated quite differently to the rest of the UK in that they do have a separate legal identity and legal proceedings can be instituted against a partnership in the trading name of the partnership in the same way as for a company (see our section 'Limited companies' for more information). However, for the purposes of enforcing any decree (court order) awarded against a Scottish partnership, it is usual for some or all of the individual partners to be referred to in the legal proceedings, along with the partnership itself. In addition, there is no limitation on the number of partners.
It is normal for the partners in the UK to put in a place a written partnership agreement detailing things like:
- How much capital each party contributes
- How profits (and losses) are shared
- How the business will be run
- How much each partner can draw from the business
- What happens if a partner becomes ill, dies, or wants to exit from the partnership
- Arrangements for introducing new partners
The advantages and disadvantages of a partnership are much like sole trader, but with these additional considerations:
- There is flexibility to tailor the structure of the partnership the way you want it, and this can be done through the partnership agreement.
- Responsibility for managing the business is shared
- The financial risks of the business are also shared
- By having a number of partners you are able to have people with different skills involved in running the business
- Extra money for your business can be raised by bringing in new partners who have to make a capital investment in exchange for becoming a partner.
- Whilst the business can be set-up with few formalities in much the same way as sole trader, it is important to put in place a partnership agreement.
- Joint and several liability. Each partner is personally liable for all the debts of the partnership (except tax on profits), even if they were caused by another partner. Also, as for a sole trader, your personal assets will be at risk if you can't repay the debts of the partnership.
- If one partner acts negligently all partners can be held liable
- If partners disagree with each other it can cause problems in running the business
- Business decisions, including entering into credit agreements, can be made by one partner yet affect all partners. A properly drafted partnership agreement can help in avoiding these problems.