Partnership and membership protection
Lee Allan Articles
Posted by: Lee Allan - 2012-02-08
Why is there a need for partnership protection?
A partnership is defined in section 1 of the Partnership Act 1890 as \\\'the relationship which exists between persons carrying on business in common with a view of profit, other than by way of membership of a body corporate.\\\' There is no longer any limit as to the number of partners a business can have.
Within a partnership, each partner has an interest in the business rather than the ownership of ordinary shares, as would be the case in a limited company structure. In the absence of a partnership agreement, section
33 of the Partnership Act 1890 states that the partnership is dissolved if one of the partners die. The valuation of the deceased partner\\\'s interest is based on their share of the assets of the business.
A limited liability partnership (LLP)
A LLP is a form of legal entity, which is a corporate body formed in accordance with the pensions of the Limited Liability Partnership Act 2000. Each member has an interest in the business, rather than ownership of ordinary shares.
If there is no membership agreement, section 7 of the Act provides that where a member has died, their personal representatives may not interfere in the management of the business. However, they are still entitled to receive whatever the member would have been entitled to.
Valuing the partnership and membership interest
The valuation of partnership or membership interest can be difficult and therefore it is strongly recommended that the partnership or LLP has a formal agreement which sets out how this value will be established and, in the case of the partnership, allows the business to continue in the names of the remaining partners.
In the event of the death of a partner or member, the beneficiaries of the estate will usually be their family. They may have no experience of running a business and may not be able to contribute to it in any way.
In these circumstances they will usually wish to withdraw their share of the capital at the earliest opportunity. Having partnership protection in place ensures that the family can receive a fair value for that interest.
Partners\\\' or member\\\'s interests From the surviving co-owners point of view, they will be continuing to run the business with a sleeping partner or member taking a share of the profits.
They will therefore be keen to pay the family their share of the business back as soon as possible. Partnership or membership protection ensures that the partners or members will have sufficient funds to do so.
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