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  • Writer's pictureGarrett Stuart

What is a Partnership?

Updated: Mar 20

Decorative blog image for What is a Partnership | Halcyon Accounting Services Worthing

If you’re thinking about setting up a business in the UK, then a partnership is one of the ways that you might go about establishing that company. It isn’t the only option, and whether it is right for you will depend on a number of factors, including what the goals of the business are, how many people are to be involved, and how profits are shared, and tax considerations.

For companies that are considering creating partnerships with individuals or other countries worldwide, there are different rules, both in the UK, and in those countries overseas. You’ll need to look at the implications for all elements of the business, including tax, with an accountant or tax professional in the other countries that your partners are, so that you’re fully informed – and as always, before making any decisions, check with an accountant in the UK too. s

What is a partnership?

Let’s keep this brief. A partnership is a simple way of setting up a company between two or more people (or companies), where they share the ownership of the business. Each partner shares equal responsibility for managing the day to day running of the company, as well as the income, and any losses or debts that are incurred by the business.

What are the advantages of creating a partnership?

Let’s start looking at the reasons why a partnership is a good idea – there are some really good reasons to do so!

Partnerships are less formal, with fewer obligations

Partnerships are really simple entities, and there are no confirmation statements or anything along those lines required by Companies House. If you think the business might need closing down quickly and easily, then a partnership could be right for you – as it can be easily broken up at any point.

A partnership is simple to set up and start trading

With no requirements to register with Companies House, and registration with HMRC being straightforward, the only thing you will want to consider before you get started is a partnership agreement. Even that isn’t essential, but it is a good idea to do so, because then all parties are protected.

Partnerships mean the work is a shared load

Not only are you going to be sharing the workload, but you’re also going to have someone else alongside you to help you when times are tough. If you’re just starting out in business for the first time, having another person to talk to about your stresses and strains that can really understand because they are in it with you can be priceless.

More partners = shared knowledge, skills and contacts

Different people involved in the business will bring different skills and experience to the business, which can lead to the business being more successful. It might be that one partner handles a certain aspect of the business while another does something entirely different, so that they can work most effectively, or they might cross-train each other (and team members) to reduce the chances of a single point of failure.

Shared decision making can be easier

If you’re a sole trader, making decisions can be hard, especially if they could have huge repercussions if they turn out to be the wrong one. Having a partner – or more than one – means that you share those difficult decisions, and have alternative perspectives that might lead to a better outcome.

Privacy is enhanced in a partnership

The details of a business partnership are kept completely confidential, and there are no requirements to make anything public. This is in contrast to other business models, where many details about companies are available for anyone to access through the Companies House website.

All control belongs to the partners

For many companies, answering to, and delivering results for shareholders can get in the way of businesses achieving what they want to achieve – especially if they are working to different targets than just increased profits.

Extra partners leads to increased income potential

More partners, more opportunities to grow the business, and likely, additional finance with them. While borrowing can sometimes be tricky for partnerships (we’ll get to that in a moment), extra partners means that the chances of borrowing are likely to be higher.

Adding an additional partner is relatively simple

It is pretty straightforward to add an extra partner to an existing partnership, which is a good thing if you decide down the line that you need another person on board – whether that is an outsider, or someone within the company. The only time this isn’t the case is if there’s a formal partnership agreement that prevents an extra partner being added.

Profits are easily divided in a partnership

Where profits are concerned, it is easy to deal with them in a partnership, since profits are split equally between partners. Tax that is owed is paid via each partner’s personal tax returns, instead of being paid as a salary with PAYE (Pay As You Earn) or in the form of dividends.

What are the challenges of creating a partnership?

While forming a partnership can be the best decision for some businesses, there are definitely things you need to be aware of if you’re considering a partnership. Let’s take a look.

Partnerships don’t have independent legal status

With a partnership, the business is intrinsically linked to each person – there is no legal separation from your personal finances and your business. That means unless an agreement is in place, if a partner resigns, no longer wishes to be involved with the company, or even if they die, the partnership needs to be dissolved. This is partly why partnership businesses are viewed as insecure or unstable, particularly if the other partners are unable to purchase the outgoing partner’s share.

A partnership has unlimited liability for the partners involved

A partnership can be much riskier for the partners involved, since they are jointly liable for any debts incurred by the business. That means that each partner will need to cover any debts personally if the business folds, up to and including the sale of possessions to repay the debt.

Partnerships are seen as lower status than limited companies

Partnerships can imply that a business is less permanent than a limited company, and that’s partly because they are closed; financial information can’t be checked at Companies House. This means that some individuals, businesses, and financial entities such as banks won’t work with companies that are formed as partnerships.

It can be harder for partnerships to secure capital

Where there are a number of partners, it may be that the partners are able to put money into the business. But partnerships are still likely to find it harder than limited companies, for example, to borrow money. There’s a lack of permanence around partnerships, and it can be harder for banks and investors to see what is going on within a partnership, which may mean they are less likely to lend to them – or they might charge significantly higher rates.

With more than one person involved, potential for conflict is higher

Even the best of friends that go into business together can end up butting heads over time when they work in close proximity, especially if each partner has different hopes for the business. In order to prevent conflict ending with the partnership being closed down unnecessarily, a partnership agreement should be created as soon as possible, to prevent any potential issues escalating.

Decision making may be less efficient in a partnership

Having more than one person to share a decision can be a mixed blessing. On one hand, you get more information and points of view, but there is a good chance that different opinions will cause decisions to be slowed. This may lead to negotiations being required, and the potential for missed opportunities.

With a partnership, profits are shared

The Partnerships Act states that all profits resulting from a partnership should be divided between partners equally. However, it isn’t always as simple as that, particularly were partners put different amounts of work into the company. If this is something you’re concerned about, a partnership agreement can deal with that issue, but if you’re planning to go down this route, you should implement them and have them signed as soon as possible – ideally, as you form the partnership.

Working with a partner (or more than one!) may be demanding

It goes without saying that where there is more than one person in a partnership, there will be different agendas, and agreements may be tough to reach. Spending time on negotiations can take away from the overall time that can be spent working towards goals, and so if you’re at all uncertain, a different business setup to a partnership may be the best way forward.

Tax arrangements for partnerships may not be suitable for you

Every business is different, and each partner’s circumstances will be different too, depending on their other business interests. With all that in mind, it is always best to consult an accountant or tax professional before forming a partnership, since changing the format of the business down the line can be difficult, and costly.

You might find that business development is limited

If you’re looking to create massive growth in your business, then there’s a good chance that a partnership isn’t the right move for you. Partnerships are less likely to find funding opportunities, there may be liabilities that inhibit growth, and legal issues, all of which might mean that a different company setup might be a better option

Setting up a business partnership in the UK

For partnerships in the UK, each partner shares personal liability. This means that should the business make a loss, require stock to be purchased, or capital expenditure be required, each partner is equally responsible.

In addition, all partners should receive a share of the profits from the partnership, but they will pay tax liabilities separately. However, a partner doesn’t have to be an individual person, since a limited company can also be a partner, and they can count as a ‘legal person’.

If creating a partnership is the right move for your business, then the good news is that it is relatively straightforward to do. That said, there are different rules for limited partnerships and limited liability partnerships, and so you should be careful to create the right type of partnership.

Working with an accountant or tax professional is always a good idea, since it removes a lot of stress and allows you to focus on your business. Appointing your accountant as an agent with HMRC will allow them to handle speaking with HMRC for you, which can be a godsend.

Once you have established whether forming a partnership is the right move for your business, then these are the steps you’ll need to take.

You will need to choose a name

Choosing a name for a business can be a tough job, but you can keep it simple too. You can trade under your own names, and if you do this, you don’t need to register it as a trademark. But you will need to ensure all partners are named, as well as the business name, if you’re using one, on all your official paperwork. A few tips for you:

  • Any business name should be unique, since you’re not allowed to breach any existing trade marks. Check this – and ideally, website addresses and social media handle availability, before you make your decision.

  • Business partnership names are not allowed to imply that they are limited companies or public limited companies, and so should not include any terms such as ‘limited’, ‘Ltd’, ‘limited liability partnership, ‘LLP’, ‘public limited company’ or ‘plc’.

  • Business partnership names should not be offensive, contain foul language, sensitive words, or expressions that could cause complaints.

  • You must not imply you have a business connection with either the UK government or local authorities.

  • You must not use the word Accredited in your name unless you have express permission to do so.

  • You may also wish to register your business name as a trade mark to avoid copycats or confusion if someone chooses the same name as you.

There is more information about choosing a name for a business, and the requirements, here.

You’ll need to decide who will be the ‘nominated partner’

This is exactly what it sounds like – you need to identify which partner will be responsible for handling tax returns and all other business records.

You’ll need to register the partnership with Her Majesty’s Revenue and Customs (HMRC)

Whichever partner is the nominated partner will need to register the partnership for Self Assessment with HMRC, as well as submitting tax returns for the partnership. Each partner will need to register themselves for tax returns independently as well, and will need to submit their own individual tax returns annually.

Registration should be done online, but if there is a reason you cannot then you can use the form SA400 to register the partnership, and register as a partner using the form SA401.

You'll need to decide whether the partnership should register for VAT

You need to register your partnership for VAT if the VAT taxable turnover is more than £85,000, but if you expect the partnership to earn more than this in the future, you can register ahead of time, and this will allow you to be able to reclaim VAT on supplies. You should check with your accountant whether this is the right thing to do for your business before you go ahead.

Final thoughts

Setting up a business has to be done carefully and with consideration – this will help you steer clear of avoidable problems down the line. Partnerships can be the perfect setup for many companies, especially if the business is likely to be a short-term project, but there are advantages and disadvantages to consider for all businesses, which should be clearly understood before making the jump. It is always, always worth discussing with your accountant or tax professional before making this decision, since they will be able to explain how creating a partnership may impact your earnings, your tax liabilities, and other factors that may influence your decision.


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