Risks and rewards can be allocated flexibly between the partners and this is a key reason that they have been widely used for over 100 years in a variety of investment and business scenarios.
In fact, the legislation which governs traditional general partnerships was set out in the 1890 Partnership Act, which remains in force today.
General partnerships benefit from less arduous reporting and auditing requirements than incorporated entities or other collective investment structures. In addition, partnerships are not separate entities for tax purposes and profits or losses are allocated to, and assessed directly on, the individual partners.
This avoids two layers of taxation and allows for much flexibility in constructing ways and means for like-minded individuals to come together and run their business.
The activities of a partnership are typically governed by a partnership deed that is usually agreed at the outset of a venture, but which can be varied thereafter, should an agreed majority of partners agree. This affords a degree of protection to those partners who otherwise may have been vulnerable as minority stakeholders in, for example, a limited company.
Partners in a general partnership have joint and several liability for any debts or liabilities incurred by the partnership and the partners. Typically, however, investments through general partnerships are organised so as to reduce or effectively eliminate the risk of individual partners becoming solely responsible for any such liabilities. Additionally, insurance is often available to protect individuals from business risks, as well as each other.
Limited liability partnerships are a more recent invention and were originally intended to allow certain professions to limit the extent of personal liability for the actions of their fellow partners. For example, many legal and accountancy firms converted to LLP status after the unfortunate demise of Arthur Andersen following the Enron collapse.
LLPs are also now used in other circumstances where such limitations are commercially desirable. The quid pro quo is a loss of flexibility in allocation of risk and reward to match different partners’ appetites and personal circumstances.
The tax efficiencies available via general partnerships have from time to time been considered unpalatable by successive Governments who have introduced many rules limiting the ability to use partnerships for the purposes of tax planning. However, there do remain opportunities for genuine commercial operations to be conducted so as to bring tax efficiency into the overall business strategy.
In assessing the risks associated with any investment opportunity which is delivered through a partnership, weight needs to be given to a variety of factors – the level of commercial risks and expected return to the partners, the active participation in partnership activities which the partners are expected to undertake, the allocation of risks and rewards over time, and the actual reality of the underlying investment activity together with the partners’ ability to influence the final outcome.
Trevor Castledine is chief operating officer of Future Capital Partners