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Partnership

A partnership is formed when two or more people carry on a business together with a view to profit. Like a sole trader, a partnership has no separate legal identity — the partners and the business are legally intertwined. Unlike a sole trader, the relationship between the partners introduces a layer of complexity that has significant implications for how the business operates, what happens when things change, and what estate planning is needed to protect everyone involved.

What a partnership is

A partnership is defined under the Partnership Act 1890 as the relation which subsists between persons carrying on a business in common with a view to profit. No formal document is required — a partnership can come into existence simply by two or more people trading together and sharing profits. In the absence of a written partnership agreement, the Partnership Act 1890 governs the relationship between the partners — and its default provisions are not always what the partners would have chosen if they had thought about it.

A partnership does not have its own legal personality. It cannot own property, enter contracts, or be sued in its own name — these things are done through the partners acting together or individually on the partnership's behalf. Every partner is personally responsible for the acts and debts of the partnership — including acts carried out by other partners in the course of the business.

How it is created

A partnership comes into existence the moment two or more people begin trading together with a view to profit. No registration is required. No formal document is needed — though the absence of a written partnership agreement leaves the relationship governed entirely by the Partnership Act 1890, which may not reflect what the partners actually intended or agreed.

A written partnership agreement is not a legal requirement — but it is one of the most important documents a partnership can have. It sets out the terms on which the partners have agreed to operate — their respective shares of profit and loss, how decisions are made, what happens if a partner wants to leave, what happens on the death or incapacity of a partner, and how disputes are resolved. Without one, these questions are answered by the Act — and the Act's answers are often not what anyone would have chosen.

Liability

Each partner in a general partnership has unlimited personal liability for the debts of the partnership — including debts incurred by other partners acting in the course of the business. This is joint and several liability — meaning a creditor can pursue any one partner for the full amount of the debt, regardless of that partner's individual share of the business. Personal assets — savings, property, investments — are exposed in the same way as for a sole trader.

This is the most significant risk of a general partnership structure. A partner can be held personally liable for the acts of a co-partner they had no knowledge of, and from which they derived no benefit. Understanding this risk is essential before entering into a partnership — and managing it, through appropriate insurance and a carefully drafted partnership agreement, is essential once in one.

Tax

A partnership is not a separate taxable entity. Each partner is taxed individually on their share of the partnership's profits — through Self Assessment, at their personal income tax rate. The partnership itself submits a partnership return to HMRC each year, setting out the overall profits and each partner's share — but the tax liability falls on the individual partners, not the partnership. Each partner also pays Class 2 and Class 4 National Insurance on their share of profits above the relevant thresholds.

The partnership agreement — why it matters

In the absence of a written agreement, the Partnership Act 1890 applies. Its default provisions include the following — which are worth knowing, because they are not always what partners would choose:

Partners share profits and losses equally — regardless of how much capital each contributed, or how much work each does. Any partner can bind the partnership to a contract. Decisions about ordinary business matters are made by majority vote — but changes to the fundamental nature of the business require unanimous agreement. A partnership dissolves automatically on the death or bankruptcy of any partner.

That last point is the one that causes the most difficulty in an estate planning context. Under the Partnership Act 1890, a partnership dissolves on the death of a partner — unless the partnership agreement says otherwise. For a business with multiple partners and many years of history, automatic dissolution on a partner's death can be catastrophic. A well-drafted partnership agreement addresses this directly.

No partnership agreement — the default position on death. Under the Partnership Act 1890, the death of a partner automatically dissolves the partnership. The surviving partners do not automatically continue the business. The deceased partner's estate is entitled to their share of the partnership assets — which may require those assets to be valued and distributed, potentially disrupting or ending the business entirely. A partnership agreement that includes a continuation clause, a right of survivorship in the business, or a buy-out mechanism avoids this outcome.

On death — what happens to the partnership

What happens on the death of a partner depends almost entirely on whether there is a partnership agreement — and what it says.

Without a partnership agreement, the default position under the Partnership Act 1890 applies — the partnership dissolves. The deceased partner's share of the partnership assets passes to their estate and is dealt with by their executor. The surviving partners have no automatic right to continue the business or to acquire the deceased's share. A winding up of the partnership may be required, which can be disruptive, expensive, and damaging to the business's value.

With a well-drafted partnership agreement, the outcome can be very different. The agreement may include a continuation clause — allowing the surviving partners to continue the business without dissolution. It may include a buy-out mechanism — requiring the surviving partners to purchase the deceased's share at an agreed valuation, giving the estate a fair value without forcing the business to wind up. It may include a right of first refusal — preventing the deceased's share from passing to someone outside the partnership without the surviving partners' consent.

A deceased partner's share passes under their Will — or the rules of intestacy if there is no Will. This means the beneficiaries of the estate may acquire an interest in the partnership, even if they have no involvement in or knowledge of the business. A partnership agreement should address what rights, if any, those beneficiaries have — and whether the surviving partners are obliged to accept them as partners or can buy them out instead.

On death — estate planning considerations

A partner's interest in the business may qualify for Business Relief — reducing its IHT value by up to 100% if the conditions are met. A qualifying partnership interest held for at least two years before death may be significantly outside the taxable estate for IHT purposes. The April 2026 changes introduced a £2,500,000 combined cap on 100% Business Relief — planning around this is covered in the Business Relief Trust Will helpsheet.

Life insurance written in trust — sometimes called a cross-option agreement or partnership protection policy — is a well-established way of funding a buy-out on a partner's death. Each partner takes out a life insurance policy on their own life, written in trust for the other partners. On death, the policy pays out to the surviving partners — giving them the funds to purchase the deceased's share from the estate at an agreed value. This keeps the business intact, gives the estate a fair value, and avoids the need for the business to be sold or wound up. It requires careful structuring and should sit alongside the partnership agreement rather than operating in isolation.

On incapacity — what happens to the partnership

A partner who loses mental capacity faces the same practical problem as a sole trader — there is no separate legal entity, and no automatic mechanism for someone else to step in. The incapacitated partner remains a partner in law — their interest in the partnership does not automatically transfer to anyone else. But they cannot act, cannot make decisions, and cannot sign documents.

Without a Property & Financial Affairs LPA, no one has the legal authority to act on the incapacitated partner's behalf in relation to the partnership. The surviving partners may be unable to bind the partnership to contracts, unable to access partnership accounts, and unable to make decisions that require the incapacitated partner's agreement — because unanimity may be required under the partnership agreement or the Act.

A Property & Financial Affairs LPA — naming a trusted attorney with the authority to deal with partnership affairs — gives someone the legal standing to act on the incapacitated partner's behalf. The partnership agreement should also address incapacity directly — what happens if a partner loses capacity, whether they can be removed from the partnership, and on what terms.

"Two partners build a business together over twenty years. One loses capacity suddenly — a stroke, an accident. There is no LPA. There is no partnership agreement that addresses incapacity. The surviving partner cannot act without the other's agreement on decisions that require unanimity. The business stalls. Clients leave. The value that took twenty years to build begins to erode — not because of any failure in the business, but because the paperwork was never done."

Key planning points for partners

• A written partnership agreement — addressing what happens on the death, incapacity, retirement, or departure of any partner. This is the single most important document a partnership can have and should be reviewed regularly as circumstances change.

• A Will that specifically addresses the partnership interest — what should happen to it, and whether it should be sold, transferred, or held in trust for beneficiaries.

• A Property & Financial Affairs LPA for each partner — naming an attorney with the knowledge and authority to manage partnership affairs if capacity is lost.

• Partnership protection life insurance — written in trust and structured alongside a cross-option agreement — to fund a buy-out on a partner's death without disrupting the business.

• A review of whether Business Relief applies to the partnership interest — and whether the April 2026 changes affect the planning.

• Regular review of the partnership agreement as the business grows, partners change, and circumstances evolve. A partnership agreement written at the start of a business may not reflect the position ten years later.