Knowledge

Partnership types: Ordinary (General) Partnership and Limited Liability Partnership (LLP)

A partnership is the easiest and quickest way for two or more individuals and/or companies to establish and carry on a business together with a view of profit. Partners in a partnerships share the risks, costs and responsibilities of doing business.

There are two types of partnership, namely:

  1. Ordinary (general) partnership set up by two or more people who must be self-employed, and/or companies (ltd) and/or limited liability partnerships (LLP). Unlike a limited company (ltd), an ordinary partnership is not a legal entity. It means that each partner is fully liable – also with his private property – for the debts of the partnership as a whole.
    A general partnership is not subject to income tax. Partnership profits are shared among partners in accordance with a partnership agreement. Consequently, partners being self-employed or companies must pay their income tax or corporation tax on the income derived from a partnership.
  2. Limited liability partnership (LLP), which is a corporate body with limited liability, set up by two or more individuals who must be self-employed, and/or companies (ltd) and/or limited liability partnerships (LLP). In contrast to an ordinary (general) partnership, the liability of the partners establishing a limited liability partnership is limited to the amount of the money or the guarantee they invested in their joint business. A limited liability partnership (LLP) has a legal existence independent of its partners. Similar to limited companies (ltd), a limited liability partnership (LLP) must be incorporated at Companies House and meet its formal requirements.
    Like an ordinary partnership, a limited liability partnership (LLP) is not subject to income tax. Partnership profits are shared among partners, who are liable for paying income tax on it.
    The LLP structure is frequently used by solicitors, accountants and other businesses which are not legally permitted to operate as a limited company (ltd).

The defining characteristics of both types of a partnership are as follows:

Features Ordinary (general) partnership Limited Liability Partnership (LLP)
Partners (members) of a partnership Self-employed persons, companies (ltd, plc) and other limited liability partnerships Self-employed persons, companies (ltd, plc) and other limited liability partnerships
Legal entity independent of its partners? No Yes
Partners’ liability for the partnership’s debts Unrestricted, private assets included Restricted to the amount of the money invested or to the guarantee given
Incorporation at Companies House? No Yes
To meet Companies House formal requirements? No Yes, similar to limited companies (ltd)
Registration with HM Revenue & Customs Yes Yes
Tax return self-assessment for HMRC required? Yes Yes
Subject to income tax? No No
Partners paying income tax or corporation tax from their partnership income? Yes Yes
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