Partnership and LLP formation - Legal requirements

Learning Outcomes

After reading this article, you will be able to identify and explain the legal requirements for forming general partnerships, limited partnerships, and limited liability partnerships (LLPs) in England and Wales. You will understand the statutory frameworks, the process of formation, the liability of partners and members, and the key differences between these business structures. You will be able to apply these principles to SQE1-style questions.

SQE1 Syllabus

For SQE1, you are required to understand the legal requirements and practical implications of forming partnerships and LLPs. Focus your revision on:

• The statutory definitions and formation requirements for general partnerships, limited partnerships, and LLPs
• The liability of partners and members in each structure
• The process and formalities for registration of limited partnerships and LLPs
• The distinction between incorporated and unincorporated business forms
• The default rules governing partnerships and LLPs in the absence of an agreement

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the statutory definition of a general partnership under English law?
2. Which business structures must be registered at Companies House?
3. What is the liability position of a member in an LLP compared to a partner in a general partnership?
4. What are the consequences if a limited partner in a limited partnership participates in management?
5. True or false: A written partnership agreement is required to form a general partnership.

Introduction

When advising clients on setting up a business, it is essential to understand the legal requirements for forming partnerships and limited liability partnerships (LLPs). The main statutory frameworks are the Partnership Act 1890 for general partnerships, the Limited Partnerships Act 1907 for limited partnerships, and the Limited Liability Partnerships Act 2000 for LLPs. Each structure has different rules on formation, registration, and liability. This article explains the key legal requirements for each, focusing on what you need to know for the SQE1 exam.

General Partnerships

A general partnership is an unincorporated business formed when two or more persons carry on a business in common with a view to profit.

Key Term: general partnership
A business relationship where two or more persons carry on a business in common with a view to profit, as defined in s.1 Partnership Act 1890.

Formation

No formal registration or written agreement is required to form a general partnership. A partnership can arise by express agreement or by conduct. The existence of a partnership is a question of fact, based on whether the parties are genuinely carrying on a business together for profit.

Key Term: partnership agreement
A document (written or oral) setting out the terms on which partners agree to run their business. Not legally required, but highly recommended.

Default Rules

If there is no partnership agreement, the Partnership Act 1890 provides default rules, including:

• Profits and losses are shared equally
• All partners may participate in management
• No partner is entitled to a salary
• Ordinary business decisions are made by majority; changes to the nature of the business require unanimity

Liability

Partners in a general partnership have unlimited personal liability for the debts and obligations of the firm. Each partner is jointly liable for debts incurred while a partner and severally liable for wrongful acts.

Key Term: unlimited liability
The personal responsibility of partners for all debts and obligations of the partnership, exposing their personal assets.

Agency

Each partner is an agent of the firm and of the other partners for the purpose of the business. Any partner can bind the firm and the other partners when acting within the usual scope of the partnership business.

Key Term: agency
The legal relationship where one person (the agent) is authorised to act on behalf of another (the principal).

Fiduciary Duties

Partners owe fiduciary duties to each other and to the firm. These include duties of good faith, to account for profits, and to avoid conflicts of interest.

Worked Example 1.1

Scenario: Alice and Ben agree to run a bakery together. They do not sign any written agreement. After six months, the bakery owes suppliers £10,000. Ben has no personal assets, but Alice owns a house.

Question: Can the suppliers pursue Alice personally for the partnership debts? Answer: Yes. In a general partnership, all partners have unlimited liability. Alice’s personal assets, including her house, are at risk for the debts of the partnership.

Limited Partnerships

A limited partnership is a special type of partnership created under the Limited Partnerships Act 1907. It must have at least one general partner (with unlimited liability) and one or more limited partners (with liability limited to their contribution).

Key Term: limited partnership
A partnership with at least one general partner (unlimited liability) and at least one limited partner (liability limited to their contribution), registered under the Limited Partnerships Act 1907.

Formation and Registration

A limited partnership must be registered at Companies House by submitting Form LP5 and paying the fee. The registration must state the firm’s name, nature of business, principal place of business, names of all partners, and the amount contributed by each limited partner.

Restrictions on Limited Partners

Limited partners must not participate in management. If a limited partner takes part in management, they lose their limited liability for the period of their involvement.

Worked Example 1.2

Scenario: Carla invests £50,000 as a limited partner in a property development limited partnership. She attends a meeting and signs a contract with a supplier on behalf of the partnership.

Question: What is the effect of Carla’s participation in management? Answer: By participating in management, Carla loses her limited liability and is treated as a general partner for the period she was involved in management. She may be personally liable for partnership debts incurred during that time.

Limited Liability Partnerships (LLPs)

An LLP is a separate legal entity formed under the Limited Liability Partnerships Act 2000. It combines features of a company and a partnership.

Key Term: limited liability partnership (LLP)
An incorporated business structure with separate legal personality, where members have limited liability and the LLP can own property, enter contracts, and sue or be sued in its own name.

Formation and Registration of LLPs

To form an LLP, at least two persons (individuals or companies) must subscribe to an incorporation document. The incorporation document and Form LL IN01, together with the fee, must be submitted to Companies House. The LLP must have a registered office and a name ending with “Limited Liability Partnership” or “LLP”.

Legal Status

An LLP is a body corporate with separate legal personality. It can own property, enter contracts, and sue or be sued in its own name. Members are agents of the LLP, not of each other.

Liability (LLP)

Members of an LLP have limited liability. They are not personally liable for the LLP’s debts beyond their capital contribution, except in cases of fraud or wrongful trading.

Key Term: limited liability
The principle that a member’s liability for the debts of the LLP is limited to their agreed contribution.

Members’ Agreement

Although not legally required, it is strongly advised that members enter into an LLP agreement to set out their rights and duties, profit sharing, and management arrangements. In the absence of an agreement, default rules in the Limited Liability Partnerships Regulations 2001 apply (e.g., equal sharing of profits).

Management

All members may participate in management unless the LLP agreement provides otherwise. There is no distinction between general and limited members as in a limited partnership.

Worked Example 1.3

Scenario: Dinesh and Emma form an LLP to provide consultancy services. After a year, the LLP is unable to pay its debts. Dinesh has invested £5,000; Emma has invested £10,000. There is no evidence of fraud or wrongful trading.

Question: Are Dinesh and Emma personally liable for the LLP’s debts? Answer: No. Members of an LLP have limited liability. They are not personally liable for the LLP’s debts beyond their agreed contributions, unless they have engaged in fraud or wrongful trading.

Comparison Table: Partnerships, Limited Partnerships, and LLPs

Key Point Checklist

This article has covered the following key knowledge points:

• The statutory definition and formation requirements for general partnerships, limited partnerships, and LLPs
• Unlimited liability of partners in general partnerships; limited liability for limited partners and LLP members
• Registration is required for limited partnerships and LLPs at Companies House
• LLPs are incorporated bodies with separate legal personality; general and limited partnerships are not
• The importance of written agreements to avoid default statutory rules

Key Terms and Concepts

• general partnership
• partnership agreement
• unlimited liability
• agency
• limited partnership
• limited liability partnership (LLP)
• limited liability