Partnerships
What type of Partnerships are there?
- The common relatively informal partnership which has no separate legal personality and where partners are fully liable for its debts.
- A limited liability partnership (“LLP”) which is incorporated with separate legal personality. This has most of the characteristics of an ordinary partnership but has the advantage that in general the partners (strictly called “members”) are generally not personally liable for its debts. It has the disadvantage of more formal requirements have to be met in particular the obligation to file accounts and other information which is available for public inspection.
- Limited partnership (as distinct from an LLP) – this is a vehicle normally used for specialised investment purposes. We can provide details on request.
How do I set up a Partnership?
Unlike a company, an informal partnership can be set up very easily by the parties simply operating in business together. An LLP has to be registered with Companies House and requires a Partnership Agreement although this does not have to be registered and made public.
It is advisable to obtain professional advice at the outset of a partnership to ensure that the partners understand their obligations towards each other and also to identify any legal and regulatory compliance issues which may affect the business.
Why should I have a Partnership Agreement?
A Partnership Agreement is a document which clearly sets out what the partners’ rights and obligations including:
- Profit share
- Time off for holidays/ sickness/ maternity
- Commitment to the business
- Leaving the business
It is an important document to the extent Partnerships and LLPs do not cover important issues in a partnership agreement the firm will be governed by statutory rules which are unlikely to properly reflect the partners’ intentions.
What is the difference between a Partnership and a Limited Company?
Shareholders and directors of limited companies are generally not liable for the debts of the company. A limited company has a more formal structure and is subject to more statutory restrictions, it has two tiers of management and control – shareholders and directors. In general shareholders (as opposed to directors) do not have power to incur liabilities on behalf of the company. Shareholders derive their financial benefits through dividends as and when they are declared. They do not participate directly in profits.
Informal partnerships and LLPs have partners or members only, all of whom have power, as regards the outside world to enter into commitments on behalf of the partnership or LLP and share directly between them in agreed proportions 100% of the profits of the entity.
There are consequent major differences in the tax and national insurance contributions payable by partners and companies/shareholders/directors. Tax is often the crucial consideration when making the decision whether to operate via a partnership LLP or a limited company.
What happens when I want to add a new Partner or member?
The new partner or member enters into a supplemental agreement to be bound by the main partnership agreement with appropriate variations.
A Partner or member is leaving, what steps do I need to take?
This should be governed by the Partnership or LLP Agreement. There are a number of steps which will need to be taken on the exit of a partner. It is critical for all partners that legal advice is taken to ensure that continuing partners acquire all the necessary rights to enable them to continue the business and that the leaving partner does not retain ongoing liability for the debts of the business.
Private Companies
How do I set up a Company?
We provide a full company incorporation service, including advice on the constitution contained in the Articles of Association checking availability of your company name, writing up of statutory books and issue of initial share certificates.
How can I ensure that I maintain control of the Company?
Within a company there are different types of control:
- Control at board level where all the day to day decision making takes place
- Control at shareholder level
We can advise on the best way of varying the standard arrangements so that shareholders can have the degree of control over board level decisions that they require.
What are the ongoing legal requirements following incorporation?
There are many ongoing legal requirements for a company. We can assist you in the following ways:
- Providing a comprehensive company secretarial service for Companies House filings
- Advising on individual company compliance
Protecting your Investment in a Company
How do I protect my investment in a company?
There are two types of investment you may make in a company, Debt (e.g. a loan to the company) and share capital.
Share capital investments can be either equity shares or preference shares and can be protected by adopting special Articles of Association and/or Shareholders Agreement.
What are the key benefits of such protection?
- Preventing dilution of shares
- Preventing depletion of company assets
- Providing control over decision making
- Give existing shareholders a right of first refusal to buy an exiting shareholder’s stake in the company
Debt investment can be made under a loan agreement or (if there are a number of loans on the same terms) by the issue of loan stock. The investment can be secured e.g. by a mortgage over specific fixed assets owned by the company or by a debenture charging all the assets of the company and/or personal guarantees from shareholders/directors.
Keeping Control of Decision Making
I own 51% of the shares in my company, therefore I have control. Right?
Wrong – you only have indirect control by being able to remove and replace directors. Also there are certain decisions (such as changing the Articles of Association) which can only be taken with a majority of 75% of the total votes cast by shareholders.
I own 20% of the shares in my company, therefore I have no control. Right?
Right – broadly your only effective protection is against breach of duty or oppressive conduct of the company’s affairs by those controlling or managing it. It is usually difficult and expensive to enforce such a right.
I am being excluded from decision making, what can I do?
In practice if you are only a shareholder and not a director, usually very little without the protection of a shareholders agreement or special rights in the Articles of Association.
Planning for the Future
What will happen to my shareholding if I decide to retire or die?
The answer to this question may depend on the shareholders agreement or special rights under the Articles.
The commonest arrangement is for shares to have to be offered for sale on death (and often on the lesser of a directorship) to other shareholders before they can be offered to outsiders. However, transfers to members of the shareholder’s family are often permitted without such a first offering being required. Generally there would be no obligation on the other shareholders of the company itself to buy your shares.
Planning a Joint Venture
How can I protect my investment?
An investment into a joint venture can be in the form of funds, knowledge, resources or even land. Protecting the parties from the outset and ensuring that each knows what is expected from them is the key to a successful trading relationship. The basis of this is normally a joint venture agreement covering e.g. the vehicle to be used (often a company), how decisions are to be made, the trading relationship and any licences required such as in respect of intellectual property is being exploited.
How can I protect my trade secrets/ confidential information?
Certain categories of confidential information are protected by law and a party can apply to the court for an injunction preventing disclosure or a person gaining an unfair advantage from disclosure. However, this is an expensive step and it only protects those categories of information regarded as “trade secrets”. It is better to put in place a confidentiality or non-disclosure agreement with any person who is receiving or is likely to receive your information. This will protect against unauthorised disclosure or use of most types of confidential information (not just trade secrets).
