Limited partnership - why so rare?

[eteb3]

Just read the really useful sticky in the 'Finances' forum about Sole Trader vs. Ltd.

My OH is a market researcher, self-employed, and wants to go into business with a semi-friend, semi-contact. (Alert! Really careful written agreements and graceful exit clauses needed - ht The Resolver and Mark T Jones for really drumming that in everywhere I see them post.) I'd probably put up some of the money.

So: given the disadvantages of being incorporated (higher compliance costs, eg), and the difficulty of getting people to fund you without a cut-out between them and your liabilities, why don't more people use limited partnerships?

Is there some serious downside (unlimited liability aside) that I'm not seeing?

Even the fact that a limited partner loses his/her limited liability if they manage the business looks quite useful - compare that with the plethora of posts on here about sloppy understandings of shareholder vs employee vs director, with the inevitable nightmare consequences when things go wrong.

What am I missing?

 

[billmccallum1957]

You're missing nothing.

Any business format can be successful and they can all fail miserably, more depends o the people involved than the format.

As you noted in your post, The Resolver and Mark T Jones will bring up, agreements are the key issue.

Personally, I prefer limited liability company over any other format, even for non-profits.

 

[Chris Ashdown]

The only real costs in a limited company are the accounting fees which for small companies are often in the order of £1000-1500 per year so not a great amount and for that the company is liable for everything not the shareholders, unless they sign personal guarantees on behalf of the company

Partnerships can work well but can also be a nightmare and can fall under the partnership act see http://www.legislation.gov.uk/ukpga/1890/39/pdfs/ukpga_18900039_en.pdf, unless a different partnership is defined

Normally in say a 2 person partnership both are legally responsible for the actions of the other person so if one partner causes a debt then both are responsible for seeing it paid

 

[Mr D]

Just read the really useful sticky in the 'Finances' forum about Sole Trader vs. Ltd.

My OH is a market researcher, self-employed, and wants to go into business with a semi-friend, semi-contact. (Alert! Really careful written agreements and graceful exit clauses needed - ht The Resolver and Mark T Jones for really drumming that in everywhere I see them post.) I'd probably put up some of the money.

So: given the disadvantages of being incorporated (higher compliance costs, eg), and the difficulty of getting people to fund you without a cut-out between them and your liabilities, why don't more people use limited partnerships?

Is there some serious downside (unlimited liability aside) that I'm not seeing?

Even the fact that a limited partner loses his/her limited liability if they manage the business looks quite useful - compare that with the plethora of posts on here about sloppy understandings of shareholder vs employee vs director, with the inevitable nightmare consequences when things go wrong.

What am I missing?

Any system can be a nightmare when people disagree.
However a partnership can have one of the other people make you liable for a large debt, on purpose or by accident.
Vengeful partners out to destroy you may be rare but they have been known.

 

[gpietersz]

IF a partnership is a good format and you want limited liability, it would be better to use a limited liability partnership which means even partners who are involved in the business get limited liability.

As far as getting outside investors going, the a Ltd (by shares) has other advantages. You can have different sized stakes very easily. An investor can easily sell shares if they want to leave the business. Its usually more tax efficient.

 

[eteb3]

@Chris Ashdown , why is it a good idea to avoid the Partnerships Act provisions?

Or do you mean it's just about the mutual guarantee you mention in your last line?

 

[Scalloway]

Limited partnerships have got a bad name in Scotland as they are suspected of being used for money laundering.

The number of limited partnerships in Scotland has more than doubled, from 6,117 in 2009-10 to 14,598 in 2013-14. That's now more than the number in England and Wales.

https://www.bbc.co.uk/news/business-33193553

Crackdown plan on Scottish limited partnerships

https://www.bbc.co.uk/news/uk-scotland-scotland-business-43935839

 

[eteb3]

Under Scots law they're separate legal persons on formation, but without the scrutiny that usually comes with incorporation. So yes, very nice loophole to pass a lot of money through.

 

[Chris Ashdown]

I think I am right that if you don't have a formal partnership agreement drawn up then by law the above mentioned agreement is taken by the courts to be used. It is worth paying to see a solicitor to fully explain the risks on all forms of partnership or company formation including shareholders agreements if a limited company

 

[Mr D]

Under Scots law they're separate legal persons on formation, but without the scrutiny that usually comes with incorporation. So yes, very nice loophole to pass a lot of money through.

Loophole or feature?