Partnership vs LLC

Partnership theoretically comes to an end when one of the partners dies because a partnership is in effect nothing more than an agreement among two or more persons to work together. In practice, partnership agreements usually make provision for the firm to continue even after members have dies or retired. One thing one cannot do in a partnership is to sell one’s place in it to another person. This is quite different in a limited company where any shareholder can, theoretically, sell all or part of his or her shares to a third party. Unlike a partnership, even a major shareholder need not necessarily be on the board of directors although he may have a voice in deciding who should be on the board. Conversely, a member of the board is not bound by English law to be a shareholder. The qualification ‘theoretically’ was used at the beginning of the previous paragraph because, in the case of many private companies, the founders would want to pick and choose who should be a part of their venture. They would, therefore, protect themselves by writing specific clauses into the documents creating the company (entitled the Memorandum of Association and Articles of Association in the UK). Such clauses, called ‘pre-emption clauses’ would set out the procedure to be followed should a shareholder wish to sell his shares or upon the death of a shareholder. Usually this would insist on the shares being first offered to other existing shareholders with details as to how their value should be calculated. Such pre-emption clauses are only usually found in private companies and it would be most unusual for there to be any restriction as to who may or may not hold shares in a plc. Many countries do, however, make it obligatory for anyone acquiring an interest in more than a certain percentage of a public limited company (5% in the UK) to disclose this fact. What then determines whether a small group or businessmen should form a
partnership or incorporate themselves into a limited liability company? One would assume that being able to limit one’s liabilities would be irresistible. After all, it is possible to start a limited company with only two £1 shares being issued. The working capital in such a company would be provided by loans (from a bank or the directors or their friends and relatives) which would be paid back as soon as the profit came in. However, a company with such a tiny ‘asset base’ would not be attractive to anyone who was expected to grant extended credit.
If the proprietors of a new company go to a bank for a loan, the bank will want some sort of security and this usually is in the form of personal guarantees from the directors. As this means the directors are virtually placed in the same position as if they were partners they may well decide to dispense with the expense and formalities of incorporation and simply form a partnership. In many cases the decision to be a partnership or a limited company will be strongly affected by whichever form produces the smaller income or corporation tax liability.
In such a group, the main function of the parent would be the control of capital and each of the subsidiaries would have to convince the parent board of directors of the viability of any enterprise, which required the investment of capital. The parent company might also run certain central services common to all divisions (e.g. human resources, training, information technology (IT) etc) where an economy
of scale can be achieved.