Going into business with a partner is a great way to start running a company, but it’s vital that you set up your partnership properly. Follow our guide to choosing the right business partnership structure.
Setting up a new business with someone else has lots of benefits. Rather than going it alone, you’ll have a partner to share tasks and responsibilities – and with wider skills, experience and knowledge, your new business can be quicker off the starting blocks too.
A partnership can use one of several business structures, including general business partnerships, limited partnerships, and limited liability partnerships. Each has pros and cons and different legal requirements.
General business partnerships
The simplest structure is a general business partnership – typically formed by sole traders who decide to join forces.
A business partnership doesn’t have legal status. It’s a straightforward business agreement between two or more people who want to work together. The only legal requirement is that the partnership is registered with HMRC and each partner registers for self-assessment and completes a separate tax return. All the business’s profits can be divided between partners with each partner paying tax on their share.
Each partner is personally liable for any losses the business makes. This means that if your partner can’t pay, you’ll be liable for their share of the business debts, which could see your home or other assets at risk.
Advantages of a business partnership
- Flexibility and support – Running a business with a partner means mutual support and the business won’t suffer if one partner is sick.
- Broader skills set – Partners can bring complementary skills and experience.
- Less paperwork – As each partner remains self-employed, there’s no need to deal with the administrative requirements of limited companies.
Disadvantages of a business partnership
- Joint liability – All partners are equally liable for debts incurred by the business and personal assets can be claimed by creditors to pay off debts.
- Less security – If a partner leaves, the partnership is dissolved.
- Financial transparency – Some businesses are less willing to work with partnerships – with no accounts filed with Companies House, there’s less transparency.
Setting up a business partnership
You’ll need to register your partnership with HM Revenue and Customs (HMRC). Call the HMRC ‘Newly Self-Employed Helpline’ on 0300 200 3504 or register at HMRC online.
A limited partnership is more formal than a general business partnership. It has one general partner, and one or more limited partners. Unlike the general partner, the limited partner isn’t involved in the day-to-day running of the business and has personal asset protection against debts limited to any money in the business. The general partner has unlimited liability, and their personal assets are on the line if the business cannot pay its debts.
The limited partner only gets their profits after the general partner has received their share. Limited partnerships are useful for short term projects, such as a media production, where limited partners invest but the general partner retains day-to-day control.
Advantages of a limited partnership
Managerial freedom – The general partner can get on with running the business without having to get agreement from limited partners.
Attract investors – Investors can back a venture without day-to-day involvement or unlimited liability risks.
Disadvantages of a limited partnership
Liability – The general partner has unlimited liability for losses and debts.
Administration – The general partner must ensure legal documents and agreements are in place and hold annual meetings.
Setting up a limited partnership
This is similar to registering a general partnership, and you’ll need to apply using form LP5. All partners must sign the form.
Limited liability partnerships (LLP)
A limited liability partnership (LLP) combines the flexibility of a general partnership with the limited liability of a limited company. It can be set up by two or more members – either a person or a company – who jointly own and control the business. There must be two ‘designated members’ at all times, responsible for administration such as managing the company accounts.
An LLP business structure protects its partners’ personal assets, limiting their liability to the amount they have invested in the business and any personal guarantees given when raising loans. You must set up an LLP as a profit-making business, rather than a charity or non-profit.
You’ll need to incorporate the LLP with Companies House, and report on business activities with Companies House and HMRC, similar to a limited company. However, LLP partners must complete their own annual tax return as all profit is shared and is taxed as income – an LLP doesn’t pay corporation tax like a limited company.
Advantages of a limited liability partnership
Protected assets – Partner assets are protected to the money in the business.
Flexibility – You can set the terms – such as organisation and share of profits – as a legal agreement between partners.
Disadvantages of a limited liability partnership
Disclosure – An LLP must publicly report its financials via Companies House, so partner incomes are in the public domain.
Tax – Profit is taxed as income – operating as a limited company may be more tax efficient.
Setting up a limited liability partnership
You can start the process of incorporating an LLP via the government’s partnership guide. Engage a formation agent to incorporate the partnership much in the same way as a limited company or fill in form LL IN01.