Would a legal partnership best suit my social enterprise or impact venture?

In this article we continue to explore the different legal forms that may be used for impact ventures, focussing on partnerships. Colloquially ‘partnership’ can be used to describe any sort of collaboration or working together. The legal meaning can be varied and the key characteristics of different partnerships can vary enormously. Below are four key types of legal partnership and their main characteristics.

Contractual relationship

At its simplest, a contractual relationship is an agreement between two or more people to work together on a joint project or target. Examples include:

  • Pampers and Unicef, where Pampers contributed the cost of a vaccine against maternal and newborn tetanus for each packet of nappies sold. UNICEF allowed its name to be used. The ‘partnership’ has continued for 11 years, resulted in 500,000 vaccines and has eliminated tetanus in 19 countries.
  • AgeUK and Innocent (smoothies) – this arrangement combined a leading national advertising campaign with an initiative to reduce loneliness. Innocent’s smoothies were the subject of a quirky and successful advertising campaign as their bottles were featured wearing woollie hats knitted by people organised by Age Concern. It gave older people the opportunity to pass on skills to younger‚ less experienced knitters giving them a sense of self-worth. It brings people together in knitting groups, creating new friendships and tackling the social isolation of older people. Innocent sold 94% more Big Knit units in 2009 than in 2008 and the project won the Business in the Community National Example of Excellence for Cause-Related Marketing at the 2007 BitC Awards for Excellence.
  • The Elderberry Walk Social Housing Project was an innovative tripartite partnership between alternative investment fund manager Cheyne Capital, the housing association United Communities, and community interest company Bristol & Bath Regional Capital.
General partnership

General partnerships are less frequently used since the introduction of LLPS (see below). General partnerships are formal partnerships between two or more individuals or entities, usually in relation to a trade or business. Key characteristics are:

  • Unlimited liability of each of the partners.
  • Joint and several liability so that each and all partners are personally liable for all the debts and obligations of the partnership.
  • Tax transparent so (broadly) each partner is taxed on their share of the profits each year and the partnership is not separately taxed.
  • It is not an independent legal entity so all contracts etc. are in the names of individual partners.

Historically, these were commonly used for professional businesses such as law and accountancy firms. Now they tend to be used where properties are owned by two or more individuals but are used and managed together for a single business.

Limited liability partnership (LLP)

An LLP is a hybrid of a company and a general partnership. Its principal characteristics are:

  • It is tax transparent so its members (the partners) are taxed on their respective shares of the LLP’s profits each year.
  • It has a legal identity separate from that of its members, so it can contract on its own account and can do anything that a natural person can do.
  • It must have at least two members to maintain limited liability.
  • There is a considerable degree of flexibility in how the arrangements between the members of the LLP can be made.
  • The agreement between the members is a private document (unlike the articles of association of a company).
  • The owners are the members and officers.
  • It is registered at Companies House and does have to file annual accounts.

Commonly used for business or trading partnerships, such as professional practices where the owners are actively involved in the management. They can also be used as investment vehicles for specific projects but then come with a health warning: they can be collective investment schemes which bring them within the aegis of the financial services regime.

Limited partnership

These go back to the Limited Partnership Act of 1907 but have enjoyed a resurgence of popularity in recent years as an investment vehicle through which funds from a number of investors can be channelled for a particular project, or projects. The principal characteristics of a limited partnership are:

  • Similar to a general partnership, an LP is not a separate legal entity.
  • It has two sorts of partners:
    • One or more general partners who are responsible for managing the business and (jointly and severally if there is more than one) for all the debts and liabilities of the limited partnership.
    • Limited partners who will not be required to contribute more to the liabilities of the limited partnership than they have expressly agreed, provided that they do not become involved in the management.
  • It is tax transparent so its members (the partners) are taxed on their respective shares of the LP’s profits each year.
  • An English limited partnership (that is not a private fund limited partnership) must be registered at Companies House but the agreement between the partners is private.
  • Often a collective investment scheme and therefore falls within the financial services regime.

Limited partnerships are often used as funding vehicles for specific projects or investment funds. Investors become limited partners, providing their capital in the agreed proportions and sharing profits (and losses up to the amount of their capital) accordingly. The general partner is often a special purpose vehicle (SPV) established by the promoter of the fund and it is the general partner who will be responsible for managing the business and affairs of the partnership. Private limited partnerships are a sub-category of LPs introduced for private investment funds that are not available for the retail market.

Limited partnerships have also been used for social impact bonds (SIB) where funding for the project designed to deliver the desired impact is provided by third party investors who will then be rewarded, assuming that the impact is achieved, via a payment by results contract. The first SIB was Peterborough SIB for a project designed to reduce re-offending by prisoners.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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