General or ‘ordinary business’ partnerships
To set up a general partnership you must choose a name, choose your nominated partner, and register with HMRC.
You, along with the other partners in the partnership, will be acting as agents for each other and you will be individually responsible for your and their actions as well as being responsible collectively as a partnership. As a partner, you must act honestly and in the best interests of the partnership and you must tell the other partners about any benefit you have derived from the partnership without the consent of the other partners.
You can share all profits between the partners and each partner will pay tax on their share of the profits.
Equally, you’re personally responsible for your share of any losses the partnership makes and bills for things you buy for your business (eg stock or equipment). Even if you don’t intend to operate as a partnership, if you act in a way that suggests to the public that you are, then all partners will be liable for the obligations of the partnership. So, although there is no formal requirement for a written Partnership agreement, it is a good idea to enter into such a document to prevent disputes between partners.
Special rules apply in Scotland, in relation to Scottish general partnership. While the process of registering a Scottish general partnership is the same as for general partnerships in England and Wales, the Scottish general partnership has a separate legal personality from the partners. However, every partner has unlimited liability to creditors for all the partnership’s debts. Further, a Scottish general partnership may need to be registered with Companies House in certain circumstances (eg where all partners are limited liability companies regardless of wherever they are incorporated).
Limited liability partnerships
If you become a member of a limited liability partnership (LLP), that partnership is considered to be a corporate body that exists as a separate legal ‘person’ independently of its members.
The partners in an LLP aren’t personally liable for debts the business can’t pay. Their liability is limited to the amount of money they invest in the business.
LLPs are most often set up by professional services firms, like solicitors or accountants.
You need to register your business as an LLP either online or by post. Once the LLP has been registered, you will receive a certificate of incorporation from Companies House.
You should also consider creating an LLP agreement with the other partners. This document sets out how the business will be run, the rules for sharing power and the rules for sharing profits.
If you want to set up a limited partnership you must register it as a limited partnership. A limited partnership consists of ‘general partners’ and ‘limited partners’.
The liability for debts that can’t be paid in a limited partnership is unequally shared by its partners. This means that ‘general partners’ can be personally liable for all the partnerships' debts, while ‘limited partners’ are only liable up to the amount they initially invested in the business.
Scottish limited partnerships
If you are based in Scotland, and you wish your primary place of work to be in Scotland, you can operate as a Scottish limited partnership (SLP). As with LLPs, SLPs are considered to be corporate bodies that exist as separate legal ‘persons’ independently of their members.
SLPs consist of ‘general partners’ and ‘limited partners’. Each SLP must have at least one ‘general partner’ who is responsible for the management of the SLP and who is liable for all the debts and other obligations of the SLP. Each SLP will also have one or more ‘limited partners’ who take no role in the management or decision making of the SLP and whose liability is limited to the value of their capital contribution.
SLPs are commonly used in private equity and property investment fund structures.
You need to register your business as an SLP with Companies House. Further, you should consider entering into a partnership agreement detailing the partners’ roles and responsibilities. It is important that any such agreement is governed by the laws of Scotland.
For more information on how to set up and run these sorts of partnerships, read Setting up a partnership and Running a partnership.