An ordinary partnership is a simple and flexible way for two or more people to run a business. There are two other types of business partnership; a limited partnership and limited liability partnerships. Although the regulations for the limited partnerships and limited liability partnerships vary from an ordinary partnership, they all have some aspects in common.
The risks, costs and responsibilities of running the business are shared by all partners. A partner can be an individual or another business, which could be another partnership or a limited company. Unless an agreement has been signed, all the profits of the partnership are shared equally between partners. Each partner must register with HMRC for self assessment, taking responsibility for paying National Insurance Contributions and income tax on their share of the profits. A nominated partner will complete and submit a partnership tax return to HMRC. There are many other regulations which apply to all types of partnership. It is advisable to agree and sign a contract between all the partners of the company to avoid disagreements.
Dissolving a partnership can occur for a variety of reasons. If one partner wants to withdraw from the business partnership the remaining partners can continue to run the business. However, technically the business will be a new partnership and the old partnership will cease. Preparing and signing a partnership agreement can prevent problems if a partnership should be dissolved, including the outlining of the circumstances which would lead to dissolution and the consequences. If a partnership agreement hasn’t been drawn up, the Partnership Act 1890 may be applied.
The Partnership Act states that a partnership should be dissolved if any one of a number of reasons should occur. A partner can give a notice of dissolution to the other partners at any time which doesn’t have to state a reason and may take effect immediately. If a fixed term has been previously agreed, the partnership will dissolve when this date is reached unless an agreement was signed to say that the partnership will continue following this period. If a partnership was set up to carry out a specific project or for a specific objective, the partnership will dissolve when the objective has been reached or the project is completed.
A partnership will automatically be terminated if death or bankruptcy occurs. Any illegal business of a partnership will result in dissolution of the partnership. Although a partnership can be dissolved by court order, it’s unlikely for this to occur as a partnership can be dissolved without the intervention of a court order.
A partnership agreement is therefore preferable so that the possible dissolution of the partnership may be pre agreed rather than relying on the Partnership Act. For instance, if one partner of the business dies the other partners may wish to carry on the business. An agreement could also have terms for buying the former partner’s shares and deciding the purchase terms.
If a partnership has to be dissolved, any proceeds from the sale or disposal of any assets should be used to pay any outstanding debts. The remaining proceeds should be divided up between the partners as agreed previously. However, proceeds of a sale or from the sale of business assets must be distributed in a specified way. The creditors have to be paid the amount owed before any other division of monies. If there is a shortfall, the partners must pay the outstanding amount from their personal assets. Once this is done, any partner that has lent money to the partnership must be repaid, together with any interest which is due. Partners must then be paid their capital entitlement before any money left is distributed to partners.
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