MANY businesses start life as partnerships between two or three people.

No legal formalities are needed, although any lawyer would advise that the partners sign up to an agreement detailing how the partnership is to run, to avoid default assumptions applying from a Government Act from 1890.

Each partner has potentially unlimited personal liability for claims against the partnership where, say, they are not covered by insurance.

This can include personal liability for wrongful acts done by other partners in the course of business and for contracts the other partners have entered into.

As turnover increases, so does risk. At this point, many business owners limit personal liability by setting up a limited liability company to run the business.

The Limited Liability Partnership (LLP) has found favour with a lot of legal and accountancy firms and is increasingly seen as a good option for any small and medium sized business. In an LLP, partners are known as members.

Like a limited company, an LLP exists in its own right separately from its members and can deal with customers and suppliers in its own name.

LLP members are not personally liable for its dealings or the actions, or failures, of other members. So an LLP member’s personal liability is usually limited to the amount of capital put in.

Also, like a limited company, an LLP needs to keep its accounts and records updated at Companies House, and those records are public knowledge.

Some partners in standard partnerships feel this is a disadvantage, although in reality, the level of detail required for the accounts of small trading LLPs is quite limited.

One major difference against a limited company is that the members of an LLP are taxed individually on their share of the LLP profits, just as though they were still partners in a standard partnership, which can be advantageous.

Setting up an LLP from scratch or converting an existing standard partnership to an LLP is usually a relatively straightforward process.

It involves registering the LLP at Companies House, transferring the business from the old partnership to the new LLP and, ideally, signing up to an agreement between the LLP and its members as to how the LLP is to operate. It is well worth exploring and considering legal advice for further information.

■ David Lucas is a partner in the law team at BHP Law. Call 01325-466794.