An introduction to partnerships.

At a glance

  • A partnership exists when two or more persons commence in business together with a view to making a profit. See When does a partnership exist?
  • A partnership must be run on a commercial basis.
  • A business is defined by s.45 of the 1890 Partnership Act as a trade, occupation or profession.
  • There are three types of partnership in the UK, each defined by a different partnership act.
    • A conventional partnership is not a separate legal entity from its owners. It is unable to hold land and property in its name.
    • A limited partnership is a partnership governed by the 1907 Limited Partnership Act. It is not to be confused with a Limited Liability Partnership (LLP).
    • An LLP is a corporate version of a partnership. It is also taxed transparently but it may hold land and property in its name.

Partnerships are transparent for tax purposes. This means that each individual is taxed as an individual, as opposed to the partnership being taxed as a body distinct from its owners.

Certain groups are unable to form partnerships and these include:

  • Charities.
  • Not-for profit organisations.

When a company is a partner in a partnership it is taxed on its profits according to Corporation Tax rules.

Overview & FAQs

There are three different types of partnership defined in partnership law:

The conventional partnership

This type of partnership is defined by the 1890 Partnership Act. Many of its key features are similar to those for a sole trader.

  • Partners are responsible for their own and each other's debts.
  • Partners are taxed on all the profits, although their share of the profits will vary by agreement.

There are some significant differences.

  • If the partnership makes a loss, partners may be restricted by the amount of capital they have contributed to the partnership when claiming sideways loss relief. Sideways loss relief is the offsetting of losses against other income. Those partners who are not fully participating in the business may face further restrictions. See Partnerships: Losses.
  • Individual partners may rent property to the partnership for use in its business.

The limited partnership

This type of partnership is governed by the 1907 Limited Partnership Act. It is not to be confused with a limited liability partnership (LLP).

Key features

  • At least one partner must have unlimited liability and they are referred to as a 'general partner'.
  • A limited partner's liability is capped. In the event of business failure (unless there was fraud or something similar) they will only lose the capital contribution that they may have made to join the partnership.
  • The common set-up is that the limited partner will provide initial funding. It is not permitted to participate in management or bind the partnership.
  • A limited partnership’s entitlement to losses is restricted pro-rata to its capital contribution.

The Limited Liability Partnership (LLP)

This trading vehicle is a cross between a conventional partnership and a company. It has the best features of each. LLPs are governed by the 2000 Limited Liability Partnership Act and the 2006 Companies Act.

Key features

  • An LLP is a separate legal entity to its members (the partners).
  • LLPs have designated partners who are the equivalent to company officers.
  • LLP accounts are filed with Companies House.
  • Partners have limited liability unless:
    • The LLP becomes insolvent and the partners knowingly allowed this to happen, in which case they may be required to repay their profits of the previous two years.
    • A partner is found to be at fault at a time when he was acting under his own personal capacity.
  • An LLP is taxed transparently as if it were a conventional partnership.
  • Losses are restricted in proportion to each partner’s capital contribution.
  • LLPs are subject to substantial tax anti-avoidance legislation. See Partnerships with mixed membership

Limited or unlimited partnership?

The LLP is the favourite type of partnership for most individuals who are conducting a trade or business because it affords the partners the protection of limited liability.

A 1907 Act limited partnership is useful for estate planning. An LLP has to file its accounts with Companies House, but a limited partnership does not. This version of partnership is the favourite vehicle for private equity and investment funds. It has the flexibility to allow for various partnership interests. A limited partnership can also be useful when one partner wishes to have limited liability as he moves to taking a back seat in the business.

If you are looking for a flexible trading vehicle in general terms, then consider a conventional unlimited partnership or an LLP. If you are looking at fund or asset management then perhaps consider a limited partnership.

Do we need a partnership agreement?

Partnerships are relationships and any relationship may go wrong. It is sensible to have a partnership agreement in place to determine (the following list is an absolute minimum):

  • Profit share.
  • Capital contributions.
  • How to deal with the arrival and departure of a partner.
  • Succession.
  • Death of a partner.
  • Divorce of a partner.
  • Partnership assets (especially for Business Property Relief for Inheritance Tax (IHT)).

See Partnerships agreements: A cautionary tale

Tax planning and partnerships

Family partnerships are a useful tool in estate planning, however, partnerships can also be very tax-efficient in terms of Income Tax and capital taxes,


Will I save tax if I trade via an LLP?.




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