There are different types of partnership, and partners joining or leaving need to understand what liability they have for the debts of the partnership, particularly after they have left.
Types of partnership
There are basically three types of partnership. These are:
- a ‘conventional’ partnership;
- a limited partnership; and
- a limited liability partnership.
Partners in the different types of partnerships have different liabilities for the debt of the partnership, so it is worthwhile understanding the basic differences.
In a conventional partnership, the partners are responsible for one another’s debts. This means that if the partnership owes VAT to HMRC, each partner is jointly responsible for the debt. So if there are five equal partners in the partnership, each partner is personally responsible for one-fifth of the debt to HMRC.
A limited partnership consists of general partners and limited partners. The general partners are liable for the debts of the partnership, while the limited partners will only lose their capital contribution and will be not liable for any further debts.
A limited liability partnership (LLP) is like a cross between a partnership and limited company, and is a separate legal entity from its partners. As it is considered to be a corporate entity, the partners are only liable for the amount they have invested. The only exceptions to this are if the LLP becomes insolvent and the partners knowingly allowed this to happen, in which case they may be required to repay their profits over the previous two years, or a partner is found to be at fault at a time when he was acting under his own personal capacity.
It is clear from this that a LLP gives the best protection for a partner’s personal assets.
Joining a conventional partnership
For new partners joining an existing partnership the position is relatively simple; the new partner has no liability for debts incurred before they became a partner and HMRC will only pursue them for existing debts. However, if partner joins part way through a VAT quarter they are liable for any debts incurred in that period, even though they may only have joined the partnership at the end of the quarter.
Leaving a conventional partnership
When a partner leaves a conventional partnership it does not mean that they are no longer liable for its debts. The leaving partner should inform HMRC of the date they leave the partnership as soon as possible, because if they do not tell HMRC it will be assumed that they are still a partner in the business, and HMRC will pursue them for the debt. Any debts incurred after they are not a partner will not be their responsibility. However, even after they have left the partnership any debts incurred before they left are still their responsibility.
HMRC say that a departing partner has an ongoing liability for VAT:
- on future trading if HMRC are not informed of the change;
- on past trading until the VAT return is submitted and tax paid; and
- on any errors subsequently discovered in past returns.
If you leave a partnership, see that the VAT returns are up to date before you go and make sure that HMRC are informed of the change.
Practical Tip:
The LLP is the favourite type of partnership for most individuals who are conducting a trade or business, because it affords the partners the protection of limited liability. Remember that when you leave a partnership you are still responsible for any debts incurred while you were a partner.
