Starting a new business with friends or family can be exciting.
Before you start trading, one of the first things you will need to decide is how your business will be structured.
The structure of your business will dictate many aspects of your commercial life, including how and when you pay tax, the personal liability of the business owners, how much information about the financials of your business will be available to the public and even day-to-day operations.
One of the most popular legal structures is the ordinary or traditional partnership, and in this article, we set out its advantages and disadvantages.
What is an ordinary partnership?
An ordinary partnership is an agreement between two or more people to go into business together and share the work and the profits of that business. Ordinary partnerships are governed by the Partnership Act 1890.
What are the advantages of a traditional partnership?
- Easy to set up
- Easy tax regime
- The ability to own and control the business
- Access to different knowledge and skills
Easy to set up – a traditional partnership does not have to be registered with Companies House, only with HMRC. The agreement to create a partnership can be verbal or in writing; however, creating a formal Partnership Agreement is vital to avoid the partnership being governed solely by the Partnership Act 1890. A Partnership Agreement should include the sharing of income and capital profits between the partners, the capital contributions required and made by the partners and also the decision-making processes and other responsibilities of each partner.
Easy tax regime – the partnership itself is not taxed; each partner must complete a Self Assessment and are individually taxed on the profits they receive
The ability to own and control the business – unlike a limited company where shareholders can constrain directors, the partners own and control the business in a traditional partnership. This provides enormous flexibility, one of a partnership's key benefits.
Access to different knowledge and skills – each partner can bring their unique knowledge and skills to the business, giving it a greater chance of success. Furthermore, the partnership’s operational tasks, for example, finance, sales, marketing, and product development, can be divided up between the partners, with each managing the areas in which they have the most experience.
Privacy – unlike a private limited company (Ltd) or limited liability partnerships (LLPs), the financial information and other partnership details are not available to the general public.
What are the disadvantages of a traditional partnership?
- Unlimited liability
- The Partnership Act 1890
- Limitations on ability to grow
Unlimited liability – refers to what type of liability a partnership has. The partners are personally liable for any debts of the business. This means that creditors may seize each partner's personal assets if the partnership falls into financial difficulties. Also, because a traditional partnership is not a separate legal entity, the partners can be personally liable for any contractual breaches.
The Partnership Act 1890 – unless a Partnership Agreement is in place, the partnership will be governed by the Partnership Act 1890, which came into force in the Victorian era. Under the Act, the partnership will automatically dissolve if one partner resigns, retires, or dies. In addition, all partners must share equally in the profits of the business, regardless of the amount of investment in time and capital they contribute.
Limitations on ability to grow – suppliers may be reluctant to enter into a Supply Agreement with a traditional partnership, mainly because its financials cannot be checked at Companies House. And because a partnership cannot offer shares, it is challenging to attract the investment needed to achieve commercial objectives. Even if you achieve growth, the lack of legal personality means the partnership cannot enter into contracts, own property, or apply for tenders in its name. As the size and ambitions of the business increase, this is likely to become an increasing problem.
Get legal assistance from LawBite
Although there are advantages for a small business, choosing to structure a venture as a traditional partnership does come with significant challenges. Our commercial law solicitors will ensure you have all the information about traditional partnerships required to make an informed decision regarding whether or not it is the most advantageous structure for your company.
Working with LawBite allows you to relax and focus on your clients and your business, knowing that the legal aspects of your business have been expertly taken care of. To find out how we can help you on all matters concerning ordinary partnerships, book a free 15 minute consultation or call us on 020 3808 8314.