General partnerships: legal nature

Q: What are the main legal risks of trading as a general partnership?

The risks flow from agency and unlimited liability: Each partner binds the others. Under section 5 every partner is an agent of the firm, and acts done in the usual way of the firm's kind of business bind all the partners unless the third party knew the partner lacked authority. Liability is unlimited. Section 9 makes every partner liable jointly for the firm's debts incurred while a partner, and sections 10 and 12 make each partner jointly and severally liable for wrongs committed by a partner in the ordinary course of business. Personal homes and savings are within reach. See partners' joint and several liability. Holding out. Under section 14 anyone who represents themselves, or knowingly lets themselves be represented, as a partner is liable as a partner to those who gave credit on the strength of it. Fragility. Without an agreement, a partnership for an undefined time can be ended by any partner giving notice (sections 26 and 32), and the death or bankruptcy of any partner dissolves it (section 33). The default rules under the 1890 Act apply to everything else the partners have not agreed. Insolvency. The Official Receiver's guidance explains that under the Insolvent Partnerships Order 1994 an insolvent firm can be wound up as an unregistered company, with the partners treated as officers who can face disqualification proceedings and as contributories with unlimited liability for any deficiency.

Q: How does this work in practice?

Illustration only. Amira and Ben start a garden design business. They never sign anything, open a bank account, buy a van on credit in Ben's name for the business, and split what is left at the end of each month. On these facts they are very likely to be partners: they carry on one business together with a view of profit and share the net result. Because there is no agreement, section 24(1) gives them equal shares of profit, even if Amira put in most of the start up cash. If Ben orders £8,000 of plants on credit for a client job, the supplier can look to Amira too, because ordering stock is within the usual way of the business. If a client is injured by a negligent act of Ben while on a job, both are jointly and severally liable. Amira would then have a claim against the firm for an indemnity under section 24(2) and, under the Civil Liability (Contribution) Act 1978, could seek contribution from Ben.

A general partnership exists whenever two or more persons carry on a business in common with a view of profit, and it can start with no paperwork at all. In England, Wales and Northern Ireland the firm is not a legal person separate from its partners, so every partner is personally exposed, without limit, to the debts the business runs up. Scotland is different: a Scottish firm is a legal person, although its partners remain liable for its debts.

Tax investigation insurance from £108.75 a year (£9.06 a month).Pays up to £100,000 of your accountant's fees if HMRC opens an enquiry. No excess. Buy online in a few minutes.

See my price in 2 questions How the cover works Accountant? Offer cover to your clients or call 01795 841 310

What turns a business relationship into a partnership?

Section 1(1) of the Partnership Act 1890 defines partnership as “the relation which subsists between persons carrying on a business in common with a view of profit”. Each part of that definition does work. “Business” includes every trade, occupation or profession (section 45). “In common” means the parties run one business together, not two businesses side by side. “With a view of profit” excludes clubs and societies and arrangements that only share costs; HMRC’s Partnership Manual at PM120100 gives the example of some dentists or doctors sharing a surgery while each keeps their own income.

Section 2 sets out rules for deciding whether a partnership exists. Owning property together does not of itself create one, and nor does sharing gross returns. Receiving a share of the profits is prima facie evidence of partnership, but it is not conclusive: a lender paid interest that varies with profits under a written, signed contract, an employee paid by a profit share, and the seller of goodwill paid out of profits are not partners by reason only of those receipts.

Labels do not decide the question. PM133000 records cases in which agreements that expressly denied a partnership were still held to create one, and a case where a father and sons working a farm were held not to be partners because there was no evidence of profit sharing. HMRC says it forms an overall view on all the facts, and that an agreement to share net losses is an even stronger indicator than sharing profits.

How is a general partnership formed?

There is no registration with Companies House and no statutory form. A partnership can arise from a written agreement, an oral agreement or simply from conduct. According to HMRC (PM134100), where partners act on an oral agreement and later sign a written one, the partnership dates from when the oral terms were implemented; but a written agreement that creates a partnership where none existed cannot operate retrospectively. The Official Receiver’s guidance notes that an agreement to trade in future is not yet a partnership, although preparing premises for trade can be enough to start one.

The formal steps are fiscal and naming rules rather than company law. GOV.UK says the partners must choose a nominated partner, who is responsible for the partnership tax return and keeping records, and that the partnership must be registered for Self Assessment by 5 October in the business’s second tax year; each partner also registers and files their own return. If the firm trades under a name other than the partners’ surnames (with permitted additions), Part 41 of the Companies Act 2006 applies: section 1202 requires each partner’s name and an address for service on business letters, orders, invoices, receipts and written demands for payment. A partnership of more than 20 persons can instead keep a list of partners at its principal place of business and say so on its documents (section 1203). GOV.UK also says a partnership name must not include “limited”, “Ltd”, “LLP” or “plc”.

Run an accountancy or bookkeeping practice? Solar Protect runs fee protection schemes for practices, so the cost of dealing with an HMRC enquiry into a client is covered rather than written off.

See how our accountant schemes work or call 01795 841 310.

Does a general partnership have its own legal personality?

Not in England, Wales or Northern Ireland. HMRC states at PM120100 that a partnership in those jurisdictions is not in law a legal person, so one partnership cannot itself be a member of another. Section 4(1) of the 1890 Act simply calls the partners collectively “a firm” and the name they trade under the “firm name”. Section 4(2) provides that in Scotland a firm is a legal person distinct from its partners, but that an individual partner may still be charged on a decree against the firm and then recover a rateable share from the firm and the other partners.

The lack of personality has practical consequences that the Official Receiver’s guidance spells out:

the firm’s rights and liabilities are the partners’ rights and liabilities, enforceable against each of them;
a partnership cannot employ people, and a partner cannot be employed by their own firm; staff are employed by the partners;
court proceedings are nevertheless brought in the firm name under Civil Procedure Rules Practice Direction 7A, as shorthand for the partners;
property is held in the names of individual partners, as the ACCA’s partnership factsheet explains, on trust for the firm.

For tax, the position is similar but not identical. Section 848 of the Income Tax (Trading and Other Income) Act 2005 says a firm is not to be regarded for income tax purposes as an entity separate from the partners. HMRC describes partnerships as transparent (PM136000): the partnership has no income tax liability, and each partner is taxed on their share. Yet the partners jointly are responsible for some tax debts, such as PAYE and VAT.

Who can be a partner, and how many partners can there be?

Partners may be individuals, companies, LLPs or trustees (PM120100). GOV.UK confirms that a limited company counts as a legal person and can be a partner. The Official Receiver’s guidance says a partnership needs at least two partners, and that the old limit of 20 partners was removed in 2002, so there is now no maximum. It also notes that a person subject to a company director disqualification order may still be a partner, because a partnership is not a company and offers no limited liability.

What are the main legal risks of trading as a general partnership?

The risks flow from agency and unlimited liability:

Each partner binds the others. Under section 5 every partner is an agent of the firm, and acts done in the usual way of the firm’s kind of business bind all the partners unless the third party knew the partner lacked authority.
Liability is unlimited. Section 9 makes every partner liable jointly for the firm’s debts incurred while a partner, and sections 10 and 12 make each partner jointly and severally liable for wrongs committed by a partner in the ordinary course of business. Personal homes and savings are within reach. See partners’ joint and several liability.
Holding out. Under section 14 anyone who represents themselves, or knowingly lets themselves be represented, as a partner is liable as a partner to those who gave credit on the strength of it.
Fragility. Without an agreement, a partnership for an undefined time can be ended by any partner giving notice (sections 26 and 32), and the death or bankruptcy of any partner dissolves it (section 33). The default rules under the 1890 Act apply to everything else the partners have not agreed.
Insolvency. The Official Receiver’s guidance explains that under the Insolvent Partnerships Order 1994 an insolvent firm can be wound up as an unregistered company, with the partners treated as officers who can face disqualification proceedings and as contributories with unlimited liability for any deficiency.

How does a general partnership differ from an LP or an LLP?

HMRC’s summary at PM131200 is a useful starting point. In a general partnership every partner is a general partner with unlimited joint liability. A limited partnership under the Limited Partnerships Act 1907 must be registered at Companies House and has at least one general partner with unlimited liability; limited partners’ liability is capped but they must stay out of management (see limited partnership reforms). An LLP is a body corporate whose members have limited liability and may take part in management; it is covered at LLPs explained. HMRC treats all three in broadly the same way for income tax.

How does this work in practice?

Illustration only. Amira and Ben start a garden design business. They never sign anything, open a bank account, buy a van on credit in Ben’s name for the business, and split what is left at the end of each month. On these facts they are very likely to be partners: they carry on one business together with a view of profit and share the net result. Because there is no agreement, section 24(1) gives them equal shares of profit, even if Amira put in most of the start up cash. If Ben orders £8,000 of plants on credit for a client job, the supplier can look to Amira too, because ordering stock is within the usual way of the business. If a client is injured by a negligent act of Ben while on a job, both are jointly and severally liable. Amira would then have a claim against the firm for an indemnity under section 24(2) and, under the Civil Liability (Contribution) Act 1978, could seek contribution from Ben.

What mistakes do people make with general partnerships?

Assuming no partnership exists because nothing was signed. The test is the substance of the relationship.
Assuming the firm, not the partners, owes the debts. In England the partners are the firm.
Calling a senior employee a “partner” on letterheads without thinking about section 14 and the risk of holding out.
Leaving the 1890 Act defaults in place, including dissolution on death and at will. A written partnership agreement is the usual answer.
Missing the Self Assessment registration deadline or leaving the nominated partner role unclear; the SA800 partnership return still has to be filed.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.