Last reviewed 29 August 2026
People often use 'partner' loosely to mean anyone who co-owns a business. Legally, the distinction matters a great deal: a partnership, a limited liability partnership and a company limited by shares have different liability, tax and governance consequences, and each is documented differently.
A partnership agreement governs a general partnership under the Partnership Act 1890 or, in modified form, an LLP under the Limited Liability Partnerships Act 2000. A shareholders' agreement governs the relationship between owners of a limited company alongside its articles of association.
This guide compares the structures and explains what each agreement needs to cover.
The three structures compared
A general partnership arises automatically when two or more people carry on business together with a view to profit — no filing required. Partners are jointly liable for the firm's debts, and liability is unlimited, which is the decisive drawback for most trading businesses.
An LLP is a body corporate with its own legal personality and limited liability for members, but it is taxed transparently, with members taxed on their share of profits. A company limited by shares is a separate legal person, its shareholders' liability is limited to unpaid share capital, and it pays corporation tax on profits with distributions to shareholders taxed separately.
What the default rules give you
Without an agreement, the Partnership Act 1890 supplies terms that rarely suit a modern business: profits and losses shared equally regardless of contribution, no automatic right to expel a partner, and dissolution of the whole partnership on the death or retirement of any partner.
For companies, the model articles are a better starting point but leave the same gaps a startup shareholders' agreement is built to fill — nothing on vesting, leavers, reserved matters, deadlock, drag and tag or restrictive covenants.
What a partnership or LLP agreement should cover
Capital contributions and how they are returned; profit and loss sharing, including any priority profit shares or salaried members; drawings and how they are reconciled against profits; decision-making thresholds, distinguishing ordinary management from fundamental decisions.
Also: admission of new members, retirement and expulsion, what happens to capital and goodwill on departure, restrictive covenants, garden leave, and a dissolution or continuation mechanism so the firm survives a departure. For LLPs, address designated member responsibilities and Companies House filing obligations.
What a shareholders' agreement should cover
Share rights and any classes; board composition and appointment rights; reserved matters requiring shareholder consent; founder vesting and good and bad leaver provisions; pre-emption on issue and transfer; drag-along and tag-along rights; dividend policy; deadlock mechanisms; and restrictive covenants.
Because the agreement interacts with the articles, the two must be drafted together. Where they conflict, the articles govern the company's constitution, so the agreement should oblige shareholders to vote to amend the articles to give effect to its terms.
Tax and commercial considerations
Partnerships and LLPs are tax transparent: members pay income tax and national insurance on their profit share whether or not it is drawn. Companies pay corporation tax, and owners can combine salary and dividends, which offers planning flexibility but adds administration.
Companies are usually the right vehicle for businesses that will raise equity investment, operate share option schemes, or seek SEIS or EIS relief — none of which work with a partnership. Professional practices and property investment ventures more often use LLPs. Take accountancy advice alongside legal advice, because tax often determines the answer.
Converting between structures
Businesses commonly incorporate an existing partnership when they start hiring, raising money or taking on greater contractual risk. It involves transferring the business and assets to a new company, novating or assigning contracts, transferring employees under TUPE, and dealing with capital gains, stamp duty and VAT consequences.
It is a manageable process but not a formality. Plan the timing around your accounting year and any funding round, and check whether key customer contracts contain change-of-control or non-assignment provisions before you move.
Key points
- General partners have unlimited personal liability for the firm's debts.
- The Partnership Act 1890 defaults — equal shares, dissolution on departure — rarely suit modern businesses.
- LLPs offer limited liability with transparent taxation; companies offer share capital flexibility.
- Only companies can use SEIS, EIS and EMI share options.
- A shareholders' agreement must be drafted alongside the articles.
- Incorporating a partnership requires contract novation, TUPE and tax planning.
Frequently asked questions
- Can an LLP have a shareholders' agreement?
- No — an LLP has members, not shareholders. The equivalent document is an LLP members' agreement, which performs a similar role in governing profit shares, decision-making and departures.
- Do we need a written partnership agreement?
- You are not required to have one, but without it the Partnership Act 1890 defaults apply, including equal profit shares and dissolution when a partner leaves. Almost every partnership benefits from a written agreement.
- Which structure is best for a startup seeking investment?
- A private company limited by shares, in nearly all cases. Investors expect shares, SEIS and EIS relief require a company, and EMI option schemes are only available to companies.
- Can we change structure later?
- Yes. Incorporating an LLP or partnership is common as a business grows, though it involves transferring assets and contracts and has tax consequences that should be modelled before you commit.