Company Law And Partnership Law

Company Law And Partnership Law

Author: Daniel Smith

“Should I choose a Partnership, Limited Company for my new business? And what on earth is a Limited Liability Partnership?”

There are similarities and differences between private companies limited by shares and partnerships and limited liability partnerships.

Any person wanting to set up a business needs to appreciate this before they decide to choose a business medium. The choice can have a real bearing on how successful the business will be because one trading style may be much more suitable for a particular enterprise or the businessperson’s particular circumstances.

When helping clients make such important decisions solicitors will usually advise their client on the implications of running that particular business. Usually you can decide on which would be best for you by understanding the advantages and disadvantages of the choice you make.

You would need to be able to differentiate the nature and formation procedures that would be necessary. Another element to focus on would be to gain an understanding on the taxation considerations involved.

A Partnership is a legal entity where the members are personally liable for the debts of the business – just as you are when you take out a loan from the bank. It is the simplest business arrangement – but even this needs careful planning. Wise business people never enter into such arrangements without a Partnership Agreement.

There’s much to say on the benefits of a Partnership Agreement which is beyond the scope of his particular article – but if one is not written the Partnership Act 1890 decides on the outcomes of any disagreements or issues. This can have very different and catastrophic consequences to those envisaged by the partners when first setting up. Obviously your solicitor can help you draft a watertight agreement to protect your valuable investment – and we’d recommend Harvey McKibbin Solicitors because they have a great track record in doing this kind of work.

A limited liability partnership is a body with a legal personality separate from that of its members this means that if your business faced overwhelming financial strain then you would not be personally held liable for the businesses debts. It is a safe approach to prevent your personal possessions from being sold because your business has not been successful. This means you would not have to worry about the financial status of your personal belongings becoming the subject of the liquidator’s interest.

LLPs and companies are quite similar and both give limited liabilities to the company founders and officers as explained above. Companies also have a separate legal personality - the registered entity itself. In addition there are registration formalities of businesses formation for a limited company including documents that are required to be filed with Companies House. Although they are similar they way they are owned and managed is quite different – for example companies must have a Memorandum of Association and Articles of Association, and certain legal duties of company officers can even attract criminal penalties if badly performed!

From a taxation perspective, the following would be the  consequences of running a partnership: Each partner would be liable to pay income tax based on their profit share in each tax year. Whenever any partnership asset is disposed for a gain, therefore a partner will incur capital gains tax liability in respect of their share. All of this means partners are always treated as individuals for tax purposes.

The advantage of using as private limited company than a LLP is usually the method that is used for transferring any ownership. This is because the ability to transfer title to shares using a shock transfer form is generally more straightforward than doing so using a LLP. Members of an LLP owe a fiduciary duty towards the LLP.

Both companies and LLPs  have an obligation to notify Companies House of any changes to the executive membership in their annual return paperwork, rather than as the events occur.

The retirement of a member from a LLP automatically dissolves it - unless otherwise stated in the Membership Agreement. This is a similar situation to straightforward partnerships. Again it highlights the wisdom of having a professional Partnership Agreement or Membership Agreement drawn up.

By now you may be a little more informed about these issues – but as you can also see  there are a huge number of considerations that need to be mulled over make before deciding on which choice of business medium is right for you!

Of course, you solicitor can help – you can try a firm with a great reputation like Harvey McKibbin or you can use the Law Society website to find out more.

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Harvey McKibbin Solicitors,
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Sutton Coldfield B73 6HN

Tel: 0121 240 9115
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www.harveymckibbin.co.uk

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