Partnership and LLP agreements: what they should cover

When you are in a partnership without realising it

Under section 1 of the Partnership Act 1890, a partnership is the relationship between people carrying on a business in common with a view of profit. No registration or written agreement is needed for one to exist. Two tradespeople who share jobs and split the profits, or two consultants who trade under a joint name and pool their fees, may be partners in law whether or not they would describe themselves that way.

That matters because partnership brings legal consequences with it: each partner can bind the others, each is personally liable for the firm's debts, and the Act supplies rules for how the business is run and how it ends. A partnership must also be registered with HMRC for Self Assessment by a nominated partner, who is responsible for the partnership tax return, and each partner sends their own tax return and pays tax on their share of the profits.

The rules that apply without an agreement

If the partners have not agreed otherwise, section 24 of the Act sets the terms of their relationship. The rules include:

• all partners share equally in the capital and profits of the business, and contribute equally to losses, whatever each has put in;
• no partner is entitled to a salary for working in the business;
• every partner may take part in managing the business;
• a partner who pays or advances money beyond their agreed capital is entitled to interest at 5% a year, but no interest is paid on capital before profits are worked out;
• ordinary matters are decided by a majority, but changing the nature of the business, or admitting a new partner, needs the consent of every partner.

The Act also leaves a partnership easy to break up. Where no fixed term has been agreed, any partner can end the partnership by giving notice to the others (sections 26 and 32). Unless the partners have agreed otherwise, the partnership is dissolved as regards all of them by the death or bankruptcy of any partner (section 33). No majority of partners can expel a partner unless the power to do so has been conferred by express agreement (section 25).

When a partner dies or leaves and the others carry on the business using the firm's assets without a final settlement of accounts, the outgoing partner or their estate can choose between a share of the profits made since then that is attributable to the use of their share of the assets, or interest at 5% a year on the amount of that share (section 42). On a final settlement after dissolution, the firm's assets are used to pay outside creditors first, then partners' advances, then their capital, with any surplus divided in the proportions in which profits were shared (section 44).

Personal liability for the firm's debts

An ordinary partnership is not a separate legal entity, and the partners are personally responsible for what the firm owes. Every partner is an agent of the firm, so a partner acting in the usual way of the business binds the firm and the other partners, unless that partner in fact had no authority and the person dealing with them knew that, or did not know or believe them to be a partner (section 5). Every partner is jointly liable with the others for the firm's debts and obligations incurred while they are a partner (section 9), and jointly and severally liable for loss caused by a partner's wrongful acts in the ordinary course of the firm's business (sections 10 to 12).

Liability does not end when a partner leaves. A retiring partner remains liable for partnership debts incurred before retirement, unless the retiring partner, the continuing partners and the creditors agree to discharge that liability (section 17). A person who deals with the firm after a change is entitled to treat all apparent members of the old firm as still being partners until they have notice of the change (section 36). A departing partner should therefore make sure clients and suppliers are told in writing, and should place a notice in the London Gazette, which counts as notice to people who had not dealt with the firm before. A partnership agreement cannot change the partners' liability to outsiders, but it can require the continuing partners to indemnify a partner who leaves.

Property can also cause difficulty. Property bought with the firm's money is treated as bought on account of the firm unless the contrary intention appears (section 21), and partnership property must be held and used for partnership purposes (section 20). If a partner owns premises or equipment personally and lets the firm use them, the agreement should say so.

Partnership, LLP or limited company

A limited liability partnership works differently. It is a body corporate with legal personality separate from its members (Limited Liability Partnerships Act 2000, section 1), so it contracts in its own name and its members are not personally liable for its debts in the way partners are. It keeps the tax treatment of a partnership: where an LLP carries on a business with a view to profit, its activities are treated for income tax as carried on in partnership by its members (Income Tax (Trading and Other Income) Act 2005, section 863).

In return, an LLP must be registered at Companies House, have at least two designated members at all times, file annual accounts and a confirmation statement, and keep its public details up to date. Members can still be required to contribute in some circumstances. If an LLP goes into insolvent liquidation, a member who withdrew money in the two years before the winding up began can be ordered to contribute up to the amount withdrawn if, at the time, they knew or had reasonable grounds for believing the LLP could not pay its debts, and knew or ought to have concluded that there was no reasonable prospect of it avoiding insolvent liquidation (Insolvency Act 1986, section 214A, as applied to LLPs). Members who give personal guarantees remain liable under them.

	Ordinary partnership	LLP	Private limited company
Separate legal entity	No	Yes	Yes
Owners' liability for business debts	Personal and unlimited	Limited, subject to insolvency rules and any personal guarantees	Limited, subject to insolvency rules and any personal guarantees
Registration and accounts	Registered with HMRC; accounts not usually filed publicly	Registered at Companies House; accounts on the public register	Registered at Companies House; accounts on the public register
Tax on business profits	Each partner pays tax on their share	Each member pays tax on their share	The company pays Corporation Tax, and owners pay tax on what they take out
Rules if nothing is agreed	Partnership Act 1890	Limited Liability Partnerships Regulations 2001	Companies Act 2006 and the articles

An LLP needs an agreement as much as a partnership does. Without one, the Limited Liability Partnerships Regulations 2001 apply default rules much like those in the 1890 Act: members share equally in capital and profits, no member is paid for acting in the business, every member may take part in management, new members need everyone's consent, and no majority can expel a member without an express power (regulations 7 and 8).

Capital, profit shares and drawings

The agreement should record what each partner has contributed, whether in money, property or clients, and whether capital earns interest and how it is repaid when a partner leaves. It should set out how profits and losses are shared, which may be a fixed ratio, a first share of profit to reflect work done before the rest is divided, or a points system that changes as partners become more senior.

It should also say how much partners can draw on account during the year, when drawings are reconciled with the final profit figures, and whether part of each partner's share is kept back to meet their tax bill, since each partner pays tax personally on their share of the profits. Setting a clear accounting date and a procedure for approving the annual accounts avoids arguments about what the profit figure is.

Decisions, management and duties to each other

The default position, that ordinary matters are decided by majority and every partner can take part in management, works poorly once a firm has more than a few partners or one partner does most of the work. An agreement should separate decisions that need everyone's consent, such as admitting a partner, changing the business, borrowing above a set amount or selling a major asset, from decisions a majority can make, and from those a managing partner or management committee can take alone. It should cover who can sign contracts and operate the bank accounts, and set limits on spending without approval.

The 1890 Act already requires partners to give each other true accounts and full information, to account to the firm for any benefit they obtain without consent from partnership transactions or from using the firm's property, name or business connections, and to pay over profits from a competing business carried on without consent (sections 28 to 30). The LLP default rules contain equivalent duties (regulation 7). An agreement usually builds on these, setting out how much time each partner must give to the business and which outside interests are allowed.

Joining, retiring, expulsion and death

This part of the agreement needs the most thought, because it decides what happens to the business and to each partner's money when the membership changes. It should cover:

• how new partners are admitted, what they contribute and how they sign up to the existing agreement;
• how much notice a partner must give to retire;
• the grounds on which a partner can be expelled, such as serious breach, insolvency or long-term incapacity, and the procedure to be followed;
• what happens on death or permanent incapacity;
• how an outgoing partner's share is valued, whether goodwill is included, and whether it is paid at once or in instalments;
• restrictions on a departing partner competing, dealing with clients or recruiting staff for a reasonable period.

The payment terms matter as much as the valuation. Unless the partners agree otherwise, the amount due to an outgoing partner or the estate of a deceased partner is a debt that arises at the date of leaving or death (section 43), and a firm may not have the cash to pay it in one sum. Payment by instalments, with interest and security for the outgoing partner, protects both sides. Where the death of a partner would leave the others unable to buy out the estate, life insurance can fund the purchase. Our guide to cross-option agreements explains how those arrangements work and why their wording affects inheritance tax.

Disputes and ending the partnership

Without an agreement, a partner in a partnership with no fixed term can dissolve it by notice. On dissolution, each partner is entitled to have the partnership property used to pay the firm's debts and the surplus paid out to the partners, and can apply to the court to wind up the business (section 39). A partner can also ask the court to dissolve the partnership on grounds that include another partner's permanent incapacity, conduct likely to damage the business, wilful or persistent breach of the partnership agreement, the business being capable of being carried on only at a loss, or where dissolution is just and equitable (section 35). Court proceedings between partners are expensive and take place in public.

An agreement can replace this with a structured route: a right to retire on notice without dissolving the firm, the continuing partners' right to buy the outgoing partner's share, and a dispute procedure that starts with a meeting of the partners, moves to mediation, and ends with arbitration or an expert's decision on questions of valuation. Arbitration keeps a dispute private, which can matter where client relationships are at stake. Our guide to commercial disputes explains the options.

Putting an agreement in place

The best time to agree terms is at the start, but an existing partnership can adopt an agreement at any point, and an agreement written years ago may no longer reflect the partners, the profit shares or the way the business now works. If you are converting to an LLP or a company, the change is a natural point to agree the terms that will apply to the new business.

Before a first meeting, gather the information the agreement will need: each partner's capital and loans, how profits have actually been shared, who owns the premises and equipment, the bank mandates, any borrowing and personal guarantees, and the points on which the partners already disagree. The time and cost depend on the number of partners, how far the key terms have already been agreed, and whether an existing agreement is being revised or a new one drafted. We agree the scope and cost in writing before we start. Where partners' interests differ significantly, for example between senior and junior partners, each may need separate advice.

Review the agreement whenever a partner joins or leaves, the profit shares change or the business changes direction, and keep a signed copy of every amendment with the original.

Frequently asked questions

What happens if partners do not have a written partnership agreement?

The Partnership Act 1890 sets the terms. Partners share capital and profits equally regardless of what each contributed, no one is paid for their work, a new partner needs everyone's consent and no partner can be expelled by a majority. If no fixed term was agreed, any partner can dissolve the partnership by giving notice, and the death or bankruptcy of a partner dissolves it unless the partners agreed otherwise. Each partner is also personally liable for the firm's debts.

Is an LLP agreement a legal requirement?

The law does not require a written LLP agreement, but without one the default rules in the Limited Liability Partnerships Regulations 2001 apply. Under those rules, members share equally in capital and profits, are not paid for their work, need unanimous consent to admit a new member and cannot expel a member without an express power. Government guidance on setting up an LLP says members should make an agreement covering how profits are shared, how decisions are made and how members join and leave.

Can a partner be expelled from a partnership?

Only if the partners have expressly agreed a power to expel. Section 25 of the Partnership Act 1890 says no majority of partners can expel a partner without such a power, and the default rules for LLPs say the same for members. An expulsion clause should set out the grounds, such as serious breach, insolvency or prolonged incapacity, the procedure and the majority required, and what the expelled partner is paid for their share.

Am I still liable for partnership debts after I leave?

Yes, for debts the firm incurred while you were a partner, unless you, the continuing partners and the creditor agree to release you. Section 17 of the Partnership Act 1890 keeps a retiring partner liable for earlier debts, and people who dealt with the firm can treat you as a partner until they have notice that you have left. Tell clients and suppliers in writing, place a notice in the London Gazette, and ask the continuing partners to indemnify you.

How is a retiring partner's share valued and paid?

It is valued and paid in the way the partnership agreement says. Without an agreement, the amount due to an outgoing partner is a debt arising at the date of leaving, and if the others carry on using the firm's assets before accounts are settled, the outgoing partner can claim either a share of later profits attributable to their share of the assets or interest at 5% a year. An agreement should set the valuation date and method, say whether goodwill is included, and allow payment by instalments.

What happens to a partnership when a partner dies?

Unless the partners have agreed otherwise, the death of a partner dissolves the partnership as regards all the partners under section 33 of the Partnership Act 1890. The deceased partner's estate remains liable for partnership debts incurred while they were a partner. An agreement can instead provide for the firm to continue, give the surviving partners the right to buy the deceased partner's share, and set out how that share is valued and paid, with the purchase funded by life insurance if the partners choose.

Are LLP members taxed like partners?

Generally, yes. Where an LLP carries on a business with a view to profit, section 863 of the Income Tax (Trading and Other Income) Act 2005 treats its activities as carried on in partnership by its members, so each member pays tax on their share of the profits and the LLP itself does not pay Corporation Tax on them. Every member must register for Self Assessment, and the LLP must still file accounts at Companies House.

Sources & further reading

• legislation.gov.uk — Partnership Act 1890
• legislation.gov.uk — Limited Liability Partnerships Regulations 2001, regulation 7
• legislation.gov.uk — Limited Liability Partnerships Act 2000
• GOV.UK — Set up and run a limited liability partnership (LLP)
• GOV.UK — Set up a business partnership
• legislation.gov.uk — Income Tax (Trading and Other Income) Act 2005, section 863

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 17 September 2026. AD Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).