A general partnership may also be referred to us a business partnership or ordinary partnership. It should not be confused with either a limited partnership or a limited liability partnership. According to the 1890 partnership act, a general partnership is defined as two people or more engaging in trade with a common interest in profit making.
General partnerships are considered to be simpler processes of owning businesses together. Each individual contributes capital, time and skills just the same way as in sole proprietorship.
Understanding general partnerships
General partnerships do not have a legal existence that is distinct or separate from each partner. Profits are shared between partners with each individually taxed and profits shared thus no separate tax liability on the partnership. Again no regular filings are required as is the case with private limited companies and no complex registration process.
This simplicity, however, comes at a cost. The fact that there is no legal personality in general partnership, therefore, means that no property or assets can be owned. Again, there will be no contracts with the third parties or even grant securities.
General partnerships basically have the sole trader model in the sense that partners are personally responsible for business obligations and debts. A creditor can claim a partner’s asset to offset any arising debt. This means that partners are not protected if the business fails since each one of them is liable for debts even those created by other partners.
It, therefore, becomes even riskier if debts are created by other partners and as a liable party, you have little or no personal assets to offset. Because of this, therefore, most people will prefer to set up their businesses as private limited companies or limited liability partnerships.
Partners in general partnerships
Partners in general partnerships are persons looking forward to pursuing a business purpose together. Ordinary partnerships may consist of up to twenty partners.
It is considered that each partner is self-employed with respect to the role they have in a partnership. This does not necessarily mean that one cannot be employed in another business or be a partner in other partnerships all at the same time.
A different partner can also be admitted in a general partnership after it has been established unless the partners agree otherwise with the partnership agreement. Upon death or resignation of a partner, the partnership is dissolved. If only one party remains, he may choose to continue as a sole trader.
In general partnership, each partner is bound by the common law duty to act in utmost fairness and in good faith towards other partners. This simply means that each partner must disclose relevant information to other partners and work positively towards the benefit of the partnership as a whole.
Starting a general partnership
Starting a general partnership is considered an easy process. Firstly, one partner is appointed and assigned the role of a nominal partner. A nominal partner takes the sole responsibility of partnership registration, record keeping, and necessary reporting. The following should also be considered when setting up a general partnership.
- The name of the partnership; with partnership naming rules applicable
- Permission from the local authorities, professional bodies, and sector regulators depending on location
- For taxation purposes, the nominated partner must register the partnership with HMRC or the local taxation body. Each individual should also register as being self-employed with the said body or the HMRC
- All banking arrangements and financial records should be put in place
- An agreement with partners should be reached on whether tools and equipment are required for running the partnership. If so, individual partners should agree on individual property ownership on behalf of the partnership entity since it has no legal personality and thus it cannot own property on its own.
- The partners should agree on whether to register for VAT voluntary. This can also be done if the business exceeds the minimum turnover threshold.
- Employment contracts should also be set up and the P.A.Y.E scheme set up if the partnership considers recruiting or employing personnel.
- Mandatory business insurances must also be obtained from the business registering body.
Operating a general partnership
The general partnership is run as per the partnership act provisions of 1890. This act provides that;
- All the partners have equal responsibilities and rights with regards to partnership management
- All partners are entitled to equal share of profits and losses regardless of the capital contributed by each
- Most partnership decisions are made by simple majority rule of partners
- Decisions that affect the nature of business i.e. introduction of a new partner or other important matters must be agreed to unanimously by all partners
The above basic provisions can, however, be amended to fit how the partnership operates. The law allows for varied partnership amendments; these must however be done via the Partnership agreement to consider the purpose of the partnership, voting requirements for business decisions, information regarding financials, sharing of profits and losses, minimum contributions of members, names of partners and addresses, dissolution procedures and procedures to be followed if one partner withdraws or seizes being a partner among others.
With regards to partnership operations, the nominal partner ensures that:
- Income and expenditure details are up to date
- Partnership tax returns with details of each partner’s profits and losses are submitted yearly. The same applies to PAYE returns and VAT (if registered for both)
- Regular reports with material information are submitted to HMRC i.e. change of nominal partner, address or name of partnership, new partner details or other necessary changes
- Partners’ share of profits and losses as well reached to alongside other incomes through a self-assessment tax return so as to ensure correct insurance and tax contribution of partners
General partnerships are mostly preferred over limited liability companies more so when the business is starting or when it is at conception phase. This is because the legal liability is the owner and it ensures flexibility and partners’ control