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Partnerships and the Partnership Act 1890
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A partnership is two or more people in business together. Their agreement, or the law, sets out how profits are shared.
Why form a partnership?
More capital can be raised than by one person.
Partners bring different skills and share the workload and decisions.
Losses are shared.
Drawbacks: most partners have unlimited liability, profits must be shared and partners may disagree.
Partners bring different skills and share the workload and decisions.
Losses are shared.
Drawbacks: most partners have unlimited liability, profits must be shared and partners may disagree.
Limited liability partnerships
A limited liability partnership (LLP) is a different structure in which the members have limited liability: they can only lose what they invested.
An LLP is a separate legal entity from its members and must be registered. Many professional firms, such as accountants and solicitors, use this form.
An LLP is a separate legal entity from its members and must be registered. Many professional firms, such as accountants and solicitors, use this form.
Section 24 of the Partnership Act 1890
Partners usually write a partnership agreement. If there is no agreement on a point, Section 24 applies:
Profits and losses are shared equally.
No salaries for partners.
No interest on capital.
No interest charged on drawings.
Partners' loans to the partnership earn interest at 5% a year.
Profits and losses are shared equally.
No salaries for partners.
No interest on capital.
No interest charged on drawings.
Partners' loans to the partnership earn interest at 5% a year.
Two partners have no partnership agreement. Ali invested £60 000 and Ben £20 000. Profit is £40 000. How is it shared?
- Section 24 applies.
- Profits are shared equally, whatever capital was invested.
Answer: £20 000 each
Partnerships raise more capital and share skills, but most partners have unlimited liability. An LLP gives members limited liability. With no agreement, Section 24: equal shares, no salaries, no interest on capital or drawings, 5% interest on partners' loans.
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