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A-Z of Partnership Law

ABS Alternative business structure under the Legal Services Act – a firm where approved non-lawyers can manage or own a legal business.

Alternative Business Structure See ABS.

Bankruptcy If a partner is declared in law as unable to pay their debts, they are bankrupt. This will result in the dissolution of the partnership, unless a partnership agreement specifies otherwise.

Capital The money or assets partners or members put into the partnership or LLP.

Capital Account The part of the balance sheet of a partnership or LLP that sets out the partners’ or members’ capital.

Classes of Member See Classes of Partner.

Classes of Partner There can be many different classes of partner or member in partnerships and limited liability partnerships. These include equity partners or members, fixed share partners or fixed share members and salaried partners or salaried members. Often specific names are given to classes, for example founding members, initial members, full members, associate members, all of whom can give different voting rights, different shares of profits and different retirement provisions. See also Designated Members.

COFA The compliance officer for financial administration (COFA ) is one of the required functions in solicitors’ practices or ABSs. They are responsible for ensuring that the law firm complies with the Solicitors Accounts Rules.

COLP The compliance officer for legal practice (COLP ) is one of the required functions in solicitors’ practices or ABSs. They are responsible for ensuring that the firm complies with the Solicitors Regulation Authority’s regulations.

Company A limited company is governed by the Companies Act 2006 and, like an LLP, is a separate legal entity. It is owned by its shareholders and managed by its directors. In private companies shareholders and directors are often the same people, but need not be so. A partnership is not a separate legal entity; the partners together have joint and several liability – that means they are each individually responsible for all the liabilities of the partnership. In an LLP there is no distinction between ownership and management.

There are pros and cons to different business structures – partnerships and LLPs are tax transparent, but a limited liability partnership has limited liability for its members, but certain documents including an annual return and accounts must be filed at Companies House so it is less secretive. A company pays corporation tax and then its directors are paid salaries and its shareholders are paid dividends. It is possible to obtain benefits of both systems by having corporate members of LLPs.

Corporate Member A company that is a member of an LLP. A corporate member takes its share of profits like any other member, and pays corporation tax on those drawings.  An LLP can also be a member of another LLP.

Corporate Partner A company that is a partner in a partnership. A corporate partner takes its share of profits like any other partner, and pays corporation tax on those drawings.  An LLP can also be a partner in a partnership.

Current Account A current account is used to keep a record of shares of profits credited to a partner or member and drawings or other deductions they have taken. At the end of each year the balance of the current account will usually be transferred to the capital account.

De-equitisation This is the process where, under a partnership agreement or LLP agreement, equity is taken away from equity partners or equity members, usually because of a lack of performance. The process needs careful handling to ensure that no claims for discrimination arise.

Default Provisions The default provisions in the Limited Liability Partnership Regulations 2001 set out how an LLP is to be governed if it does not have an LLP agreement. For example, profits are to be split equally and it is not possible to expel members. Because of the default provisions, an LLP agreement is crucial.

Designated Member LLPs must have at least two designated members. These are responsible for ensuring that the LLP provides the right information to Companies House and complies with the regulatory requirements for LLPs. In all other respects designated members are the same as all other members. So long as there are at least two designated members there is no maximum number so in theory all members can be designated members. In practice it makes sense to limit the numbers to three or four.

Dissolution Dissolution is the process of ending a partnership. The assets are collected in and the liabilities discharged and any surplus goes to the partners and any deficit is owed by the partners. Dissolution only applies to partnerships; LLPs will be liquidated. If a partnership does not have a partnership agreement, any partner can dissolve the partnership. That is not beneficial for those partners who want to continue in business together.

Drawings Partners or members are not employees, but are self-employed. They do not have a salary or wages, but receive a share of the profits and are responsible for losses. When they are paid a share of their profits, these are called drawings. Most partnerships and LLPs agree that partners or members can take anticipated drawings each month so they do not have to wait until the accounts are prepared to be paid.

Employment Employment is when an individual is employed by another person, partnership, LLP or company. Employment is governed by the Employment Rights Act. Most partners and members are self-employed, although salaried partners and salaried members are employees. The tests as to who is employed are complex. Employees have employment rights, whereas partners and members are protected only by worker’s rights, which means, for example, that they cannot claim for unfair dismissal, but can claim for discrimination.

Equity The value of a partner or member’s share of a business not reflected in his or her capital.

Equity Member A member who has a share in the profits of the LLP and full voting rights.

Equity Partner A partner who has a share in the profits of the partnership and full voting rights.

Expulsion Expulsion is the process where a member is expelled from an LLP or a partner is expelled from a partnership. Neither the Partnership Act nor the Default Provisions allow for expulsion. An LLP agreement or partnership agreement is required and needs careful drafting to ensure that it is enforceable. Although partners and members are not employees, expulsion where it is discriminatory is covered by employment rights.

Fixed Share Member A member who receives a fixed share of the profits of an LLP. He or she is self-employed and can only draw those profits if there is sufficient money in the business. The LLP will not pay employers’ national insurance and the fixed share member may pay less tax.  A fixed share member who no capital or management authority may be deemed to be an employee for tax purposes.

Fixed Share Partner See Salaried Partner.

Limited Liability Partnership A partnership formed under the Limited Liability Partnership Act 2000. It has the flexibility of a partnership but some of the structure of a company and is often seen as a halfway house. It’s not so much a partnership with limited liability, as a company with a different tax regime. It has members who are self-employed and who share profits as they decide in an LLP agreement or under the default provisions. If the members do not enter into an LLP Agreement, the default provisions will apply. There is no distinction between ownership and management in an LLP. An LLP is commonly used for professional practices and consulting businesses, but can equally be used for any business or for joint ventures.

Limited Partnership A Limited Partnership is formed under the Limited Partnership Act 1907 and has general members and limited members. The limited members have no liability so long as they do not take part in the management of the limited partnership. These are rare and should not to be confused with limited liability partnerships.

Liquidation The process by which an LLP is wound up.

LLP See Limited Liability Partnership.

LLP Agreement An LLP agreement is the agreement that regulates the relationship between an LLP and its members. It is different to a partnership agreement (between partners) as it includes the LLP. It will also exclude the default provisions which is crucial for virtually all LLPs. It sets out matters involving appointing new members, classes of members, capital, drawings, retirement and expulsion among others.

Lockstep A lockstep is a process where an equity partner or equity member achieves a greater share of profit the longer he or she has been an equity partner or equity member. It can also go down as partners or members near retirement. Lockstep is one of the many methods for rewarding partners or members; the main other one being performance related pay.

LP See Limited Partnership.

Member A member is someone who is involved in the owning and running of an LLP and is registered at Companies House as a member of that LLP. Members are self-employed. See also Different Classes of Member and Designated Member.

Minimum Number of Partners A partnership must have at least two partners. Similarly an LLP must have at least two members.

Partner A partner is one of two or more people or who together run a partnership. Partners are self-employed. See also different classes of partner.

Partnership Partnership occurs whenever two or more people go into business together with a view to making a profit. There does not need to be an intention to create a partnership; it just occurs if the criteria of (1) two or more people (2) go into business (3) to make a profit are met. There is no need for a formal partnership agreement and if one is not entered into the partnership is governed by the terms of the Partnership Act 1890.

Partnership Agreement A partnership agreement is the agreement that regulates the relationship between partners. It sets out matters involving appointing new partners, classes of partners, capital, drawings, retirement and expulsion among others. A partnership agreement will specify that the retirement of a partner does not dissolve the partnership. Without a partnership agreement, it is possible for partners to dissolve the partnership at will. This is not beneficial for the continuing partners.

Partnership Tax Partners and members are taxed as individuals on their share of profit in the partnership or LLP. They are taxed on their share of the profit not on their drawings. If they leave money in the business it will be taxed. A company pays corporation tax on its profits. The shareholders and directors will pay tax if they draw money out of the company.

Retirement Retirement is the technical name given for someone leaving a partnership or LLP. It is not the same as the word ‘retirement’ in general usage in that it has no connotations of stopping work, gardening and slippers! Most partnership agreements and LLP agreements will include retirement provisions otherwise a separate retirement agreement needs to be drawn up. Both these will include how the retiring partner or retiring member will get back their capital and whether they are paid anything for their equity.

Salaried Member It is possible to have salaried members, but it makes more sense to have fixed share members in an LLP.

Salaried Partner A salaried partner is an employee who is given the title ‘partner’. They do not share in the profits of the partnership, but they are liable for the liabilities of the partnership. They should have an indemnity from the equity partners.

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