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Is a Partnership Suitable for My Business in the UK?

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When starting a business, you will need to decide how you want your business to trade in the UK. There are several options, including sole trader, partnership and limited company. Each of these differs in terms of the number of people involved in the business, HMRC obligations and how it runs daily. This article will discuss why a partnership might be a suitable business structure for you and key legal considerations. 

What is a Partnership?

A partnership is a business structure involving at least two people who own the business and therefore share the responsibilities. The partners will share the following:

  • business profits and losses;
  • business debts; 
  • responsibilities in the day-to-day running of the company. 

An interesting point about partnerships is that you can choose a partner that is not a real person. Since the law treats limited companies as a legal person, you have the option of partnering with a limited company if this is something you are considering.

When setting up a business partnership, it is best practice to draft a partnership agreement. If you do not have one, standard rules under the Partnership Act will apply, meaning all partners will be equally entitled to business profits and debts that have accrued. A partnership agreement will clearly outline the general obligations of each partner and cover other considerations such as:

  • the financial contribution of each partner;
  • ownership percentages for each partner;
  • how any disputes between partners will be resolved;
  • responsibilities of each partner;
  • processes in place for amending the partnership agreement; and
  • process of business partners leaving the partnership.

Limited Liability Partnerships (LLP)

You can also register your business as a limited liability partnership (LLP). This business structure is similar to a limited company but still maintains the characteristics of a partnership. If you wish to have an LLP, you will need to register with Companies House in the same way as a limited company.

One major benefit of an LLP is that each partner will have limited liability. This means they will not be personally liable for any business debts, and all personal assets are safe. Limited liability is a huge benefit to businesses, as you can ensure your personal assets and business assets are completely separated. 

Limited liability plays a huge part in how businesses structure themselves and is often the popular choice when dealing with creditors and loans.

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Tax Considerations of a Business Partnership

Additionally, there are important advantages to trading as a partnership. One main benefit is the efficiency of taxes. Under a traditional partnership, a nominated partner will first need to register with HMRC for self-assessment. There is a legal requirement that this nominated partner will be responsible for submitting the partnership tax return to HMRC. 

The partnership itself does not pay tax. Instead, profits from the business flow to each partner and individual partners then pay tax on their earnings rather than obtaining a salary that is subject to PAYE and national insurance. However, if you decide you want to trade as a limited liability partnership, your tax obligations will differ as you will then have to pay corporation tax.

Advantages of Partners Working Together

An advantage of partnerships is that you will have multiple people to share the responsibility of running the business and its costs. Partnerships can often have greater credibility among different industries, which can prove beneficial if you need greater borrowing capacity. You can also bring on new partners, which can increase skill sets and resources.

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Key Takeaways

Partnerships are a type of business structure that involve two or more people. You can choose to have a traditional partnership or a limited liability partnership which is similar to a limited company. A partnership business can have benefits in terms of access to resources and more help with responsibilities. If you choose to become a LLP, you can also obtain limited liability, which means partners would not be held liable for partnership debts.

If you need advice around deciding how to structure your business or creating a partnership, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

Is a business partnership a good idea?

A business partnership can be a good idea to obtain greater expertise and resources to grow your business. However, there are important considerations to bear in mind, as ownership and profits are split between partners. A well-drafted partnership agreement can document these details in writing. 

How does a business partnership work in the UK?

Partners share ownership and, therefore, all responsibilities for the business. Partners are responsible for the day-to-day running of the business and will share profits and losses in agreed ways, usually outlined in the partnership agreement.

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Fiona Prior

Fiona Prior

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