 In a partnership, two or more people share the risks, costs, and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. The legal position is that if one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved but the business may not need to cease. In practice, there are a few legal formalities that need to be completed to ensure that a business remains ongoing.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
If two or more people wish to go into business together, but without going down the Limited Company route, a partnership offers a simple way to get started, similar in many ways to going the sole trader route for an individual.
A partnership has no legal status, as a Limited Company would, it is merely a vehicle linking two or more self-employed people in a simple business structure.
Essentially, each of the partner’s business income is counted alongside their existing personal income, so the accounting side of your business will be very straightforward. As the name suggests, partners are personally liable for any debts incurred in the running of your business, which wouldn’t be the case under the Limited Company route.
You will not need to notify Companies House, nor deal with any of the administrative or accounting requirements applicable to Limited Companies. Each partner will need to inform the Inland Revenue that they are now self-employed.
In terms of accounting, you will need to submit an annual self assessment form for the partnership and each of the partners to the HM Revenue & Customs and keep accurate and up-to-date records of all business transactions and accounts. You will also pay income tax on all profits and pay national insurance contributions on those profits.
It is worth bearing in mind that, from a legal standpoint, if either of the partners withdraws from the business (if they die, resign or go bankrupt), the partnership must be dissolved instantly, since it has no legal status. However, in reality the business can continue to exist once certain legal formalities have been completed
As partners are self-employed; they are taxed on their share of the profits. Each partner needs to pay fixed-rate Class 2 National Insurance contributions (NICs) and Class 4 NICs on their share of the profits.
In a partnership, each partner takes a share of the profits as per the Partnership agreement. The profit-sharing ratio can be changed from year to year provided that the ratio for each tax year is documented in the Partnership agreement. In a partnership, the partners own the assets of the business personally, their share of the assets being reflected in the capital-sharing ratio. This has implications for Capital Gains Tax for each partner. The capital-sharing ratio does not necessarily have to be the same as the profit-sharing ratio (and often isn’t), it is also documented in the Partnership Agreement. As with sole traders, each individual partner and the partnership itself must make annual self-assessment returns to HMRC. The partnership should also keep records showing business income and expenses.
It is important to note that in a partnership,
each partner is personally responsible for all debts run up by the partnership as a whole. This means their homes or other assets may be at risk if the business fails.
It is important to understand that a partnership is a relationship of trust and you need to ensure that you and your fellow partners have that sort of relationship and have the same expectations of the business. Once you have decided that you wish to set up a Partnership and are looking for a partner, you would need to consider if an ordinary or limited partnership would be the best for your business as the two structures have different levels of liability and responsibility.
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The partner or partners would take on unlimited liability for any debts incurred by the business and all profits would be shared equally. Ordinary partners also take on equal responsibility and decision-making in the running of the business.
Limited partnerships accept limited liability to the amount invested, and whilst profits are shared equally the responsibility and control of the business lies with the ordinary partners. Limited partners are often seen as "Sleeping Partners" as they do not directly involve themselves with the business they are in partnership with. Limited partnerships are different from Limited Liability Partnerships (LLP's). An LLP is similar to a normal partnership - but it also offers reduced personal responsibility for business debts as the LLP itself and not the individual members - is responsible for any debts that it runs up (unless the individual members have personally guaranteed a loan to the business). For more about Limited Liability Partnerships click here
If a partnership would prove the best way forward for your business, you would first need to decide how many partners would benefit the business.
You would also need to decide how you would like the partners to integrate within the company, and should also consider the following
- The partner or partners' abilities to drive the business forward
- Leadership qualities and management experience
- Level of specialist knowledge and expertise
- The level of trust associated with the partner
It's a good idea to . For further advice, consult your accountant or solicitor or call our Small Business Team on 01223 507080. Our solicitor can be brought in to collate partnership agreements that would include the following points:
- The amount of capital each partner will invest
- Profit ratio dependent on the amount invested
- Debt liabilities - whether ordinary or limited partnership
- Seniority and control over the business
- The rules on admitting new partners
- Rules on ending the partnership
To find out more about , please call us at +44 (0)1223 507080 or email at info@tax.uk.com
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