A partnership automatically occurs when two or more people join in business with the aim of making a profit.
Although the term 'partnership' is commonly associated with the joining of only two people, a business partnership can consist of any number of people.
Types of partnership
The term 'partnership' refers to the business itself. There are three different types of partnership to choose from:
- simple partnership
- limited partnership
- limited liability partnership (LLP).
Why start a partnership?
If you don't like the idea of going through formalities to incorporate your business as a company, but you would like to share the effort and responsibility of owning a business, a partnership could be for you.
Partnership vs sole trader
There are a number of reasons why working in a partnership might suit you more than working as a sole trader:
- You want to share responsibilities with one or more persons.
- You need further investment from one or more persons.
- You require the combined skills, knowledge and experience of one or more persons.
- You want to give your business the means to expand and develop.
Partnership vs limited company
Of course, a limited company can offer all of the above benefits too, so what are the unique benefits of choosing a partnership over a limited company?
- Setting up a partnership is easier than setting up a limited company - there are fewer legal obligations and less paperwork.
- Ending a partnership is just as straightforward as starting one.
- Because they are bound by less legislation, partnerships are generally favoured for their flexibility. Partners can draw up their own agreements and conduct business how they like. Whereas companies are strictly monitored.
- Businesses wishing to start as partnerships have the option of starting a limited liability partnership, which shares many characteristics of a limited company and offers limited liability. The main difference between the two is that limited liability partnerships must allocate certain partners who have more responsibility over the company.
Types of partner
Different partnerships can have different kinds of partners, depending on their role in the business. These are:
- Both simple partnerships and limited partnerships have general partners.
- General partners invest in the business, run the business and share the business's profits.
- General partners are subject to unlimited liability.
- Both limited partnerships and limited liability partnerships have limited partners.
- Limited partners are not permitted to have a hand in the daily running of the business, they simply invest money then take a share of the profit.
- Limited partners are subject to limited liability, meaning that their debts are limited to the amount they originally invested.
Below is a table comparing the responsibilities of general and limited partners. This should allow you to see where their responsibilities overlap and where they differ:
Say in business decisions
Receives share of profit
What is a simple partnership?
A simple partnership, otherwise known as an ordinary partnership, is known as one of the more basic forms of business structure.
In a simple partnership, two or more people share ownership of their business with unlimited liability. This means that, like with sole traders, there is no legal distinction between the partners and the business itself. If the business runs up debts, then the partners are responsible for paying them off. If one partner cannot pay, then the other must pay for them. If neither partner can pay, both partners' personal assets will be at risk of repossession.
Advantages and disadvantages of simple partnerships
Like with every business structure, there are disadvantages as well as advantages to setting up a simple partnership.
- Simple - Simple partnerships, as the name suggests, are relatively quick and easy to set up. There are no legal costs because they don't need to be registered with Companies House.
- Less tax - There are fewer tax obligations with simple partnerships because they are not required to pay Corporation Tax- only Income Tax and National Insurance as usual.
- Fewer numbers - Only one partner need fill out a tax return, so if one of you prefers the aesthetic side of business, such as branding, design, logos etc., then that individual need not worry about the numbers side of things. If neither of you feel comfortable keeping track of your finances then you can hire an accountant to act for you.
- Man power - Unlike sole traders, simple partnerships benefit from the combined experience, knowledge and skill of more than one person without the hassle of starting a company.
- More money - As well as more knowledge, simple partnerships often benefit from a higher capital. With more people willing to invest money, more money can be invested in useful business assets like equipment, machinery, premises or marketing and promotion.
- Less blame - If a sole trader goes wrong, a sole trader goes wrong alone. Partners on the other hand can not only confer and learn from one another, but support one another financially.
- Less credibility - Although setting up is simple due to the lack of registration, it also has its downside- not being registered to Companies House means that simple partnerships don't get a company number. Company numbers are reassuring for potential customers who want evidence of a business's credibility.
- Arguments and disagreements - Running a business is stressful. One of the obvious disadvantages of running jointly with others is that disagreements are bound to come up. Disagreements can lead to arguments, where things could get personal. Disliking your partner is bound to have a profound effect on the success of your business.
- Liability - Simple partnerships have unlimited liability. This means that each partner is equally responsible for paying off debts and losses incurred by the business. If one partner can't pay, then the other must compensate for them.
- Time-consuming - Joint responsibility means having to confer over every decision. This can take time, which could affect the rate of service delivered to customers.
- Taxation - Partners must pay the same tax rates as sole traders, which are often higher than those paid by companies. This includes Income Tax and National insurance. Each partner is required to fill out their own Self Assessment forms.
- Profit sharing - Because the partners are working together, all business profit must be distributed fairly between everyone. This can lead to problems if, for example, one partner doesn't put as much effort in as another.
Registering as a simple partnership
Because simple partnerships are subject to unlimited liability, each partner is officially self-employed and therefore legally responsible for themselves. Registering a partnership is very similar to registering as a sole trader. There are two things to do when starting a simple partnership:
Each partner must register as self employed to HMRC for tax and National Insurance contributions. Find out more about Income Tax rates.
By law, one partner must be appointed as the 'nominated officer'. This partner will be responsible for completing the annual Partnership Tax Return for HMRC. The Partnership Tax Return should document all income, expenses and losses and show how financial responsibility has been divided between the partners.
What is a limited partnership?
A limited partnership occurs when general partners invite limited partners to share the ownership of their business. The general partners run the business and answer to all debts and losses. Limited partners simply invest money, with no say in management.
This form of business would suit two or more individuals who want full control over their business with extra investment from external sources.
Limited partnership rules
Limited partnerships are governed by the Limited Partnership Act of 1907. This carries a number of rules, including:
1. Limited partners do not have any authority to withdraw money from the partnership. If a limited partner withdraws any of their original investment, they immediately lose their protection as a limited partner. This means that they become liable for any debts and losses up to the amount they received from the partnership.
2. Limited partners must not play any hand in the running of the business. If they do, they will lose their limited liability and be made responsible for any debts or losses incurred during the time of their management role.
3. Overseas businesses cannot be registered with Companies House as the main premises needs to be within the UK.
Registering a limited partnership
If you would like to set up a limited partnership then you will need to register with Companies House. Companies House require a registration fee and you will also need to provide the following information:
- name of your firm
- nature of your business
- location and name of business premises
- terms and conditions that you and your partners have agreed
- date you intend to start your business
- contact details of every partner, both general and limited
- contributions by limited partners
- signatures of all partners, dated.
Limited partnership tax matters
Unlike sole traders or simple partnerships, you do not have to register with HMRC to start a limited partnership. Companies House does this for you.
Each partner involved with a limited partnership is required to pay their own Income Tax and National Insurance from the profits they receive. Because the business is not run as a company, there is no Corporation Tax.
Limited partnerships must nominate one partner to complete a Self Assessment tax return for the business every year. In addition to this, each partner is also required to record their profits on individual tax returns.
Limited liability partnership (LLP)
What is a limited liability partnership? (LLP)
Although it sounds very similar to a limited partnership, a limited liability partnership differs in a number of ways. Most importantly of all, a limited liability partnership is considered, by law, to be an individual entity separate from its owners. All owners are subject to limited liability because the business itself carries responsibility for debts and losses. Partners are simply liable for the amount they originally invested.
This is very similar to a limited company and is regarded by many as a partnership/company hybrid. Whether it's the best of both worlds is a subject much debated in business.
How is a limited liability partnership (LLP) different from a limited partnership?
1. Firstly, whereas limited partners in a limited partnership are legally excluded from the day to day running of the business, all members of an LLP are allowed to have a say in business decisions.
2. An LLP must have at least two members. If it has more than two members, two partners have to act as 'designated members'. If there are only two members, these two will automatically become the designated members. Designated members have extra responsibilities on top of the responsibilities of the other partners:
- They are in charge of registering with Companies House.
- They must appoint an auditor if needs be.
- They must prepare and sign accounts on behalf of other members.
- They must send records of their accounts to Companies House.
- They must notify Companies House of any changes to the business such as a change of address.
- They must prepare, sign and send the annual return to Companies House.
- They must act on behalf of the business if it is wound up of dissolved.
If designated members do not carry out their duties properly, they will be held legally accountable.
How is a limited liability partnership (LLP) different from a limited liability company (PLC)?
Limited liability partnerships are very similar to limited companies and it important to understand the difference between the two- otherwise why would you choose one over the other? The main differences are:
- Limited liability partnerships (LLP) have the organisational flexibility of a partnership. This means that partners are not bound by Companies House's strict legislation and partners have the option to draw up their own deed of partnership (a formal agreement) which outlines how they wish to run their own business.
- Limited liability partnerships (LLPs) are taxed as partnerships rather than as companies. This means they are not required to pay Corporation Tax, which is levied at a higher rate than Income Tax and National Insurance.
- Limited liability partnerships (LLPs) are governed by the Limited Liability Partnerships Act 2000, whereas limited companies are governed by the Companies Act 1956.
Registering a limited liability partnership (LLP)
Registering an LLP is very similar to registering a limited company. It is a lot more complicated than registering as a sole trader or a simple partnership. You are strongly recommended by government sites to enlist the help of a qualified accountant for this process.
Limited liability partnership tax matters
There are a number of important points to remember about taxation on limited liability partnerships:
- As with a limited partnerships, you do not have to register your LLP with HMRC. This is because Companies House does it for you. You will, however, have to register as an individual in order to pay your National Insurance and Income Tax contributions.
- Unlike with limited companies, limited liability partnerships are not required to pay Corporation Tax.
- One nominated partner will need to fill out a Self Assessment tax return for the LLP once a year.
- All partners are required to fill out their own personal Self Assessment returns documenting their share of the business's profits.
All three partnerships:
Drawing up a partnership agreement
Because partnerships are not regulated as rigorously as companies, the owners aren't offered the same level of protection. For this reason, it is often a good idea to draw up a formal agreement between partners.
Drawing up a partnership agreement, known as a 'deed of partnership', is not a legal requirement, however doing so could protect you and your business in the future.
Some good reasons for drawing up a partnership agreement include:
- The deed of partnership is designed to safeguard for any future disputes between partners. If your partner or partners are family or friends, keeping an element of objectiveness and distance in your relationship ensures that personal matters won't get in the way of business.
- You can set out formal rules, including:
- The share of profit each partner receives.
- Details of each partner's individual responsibilities.
- Contingency plans for certain situation, such as what will happen if one partner leaves.
Information you might want to include in your partnership agreement:
- Name of partnership - A business name is one of the first things you need to agree on. Popular partnerships include the partner's surnames, such as 'Smith and Lloyds'. Alternatively, you can make up a new name but you must first check that it isn't already in use.
- Allocation of money - This is a good time to decide how to distribute profits, losses and draws. Will everybody receive the same amount? When will profits be drawn?
- Contribution - It is very important to record exactly what each partner has contributed to the business in terms of cash, equipment, property or services - and how this relates to their percentage of ownership.
- Authority - How much authority will each partner have over decisions? Without any form of written agreement, either partner can legally make decisions without consulting the other. If you would like mutual agreement, then you must state it in your partnership deeds.
- Responsibility - Does everyone have a different job? Now is the time to allocate duties such as book-keeping, customer service or employee management.
- Admitting new partners - You may wish to prepare for future expansion. One way of doing this is to decide on the procedure for admitting new partners.
- Withdrawal or death of a partner - In order to prepare for a partner leaving the agreement by whatever means, it is advisable to devise a reasonable buyout scheme.
- Resolving disputes - It's sensible to prepare for future partner disputes by deciding how you are going to deal with them, whether it involves court, mediation or arbitration.
How an accountant can help you start a partnership
If you are new to business, you may want to consult an accountant to help you with legal matters such as registration with HMRC (for simple partnerships), or registration to Companies House (for limited and limited liability partnerships). Accountants can also help with day-to-day business matters, such as payroll and annual return forms. HMRC recommends that partnerships seek professional help with registering a limited liability partnership due to the complexity of the process, and the necessity of everything being completed totally accurately.
Other business structures
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