If two or more people wish to go into business together, and don’t wish to set up a limited company, a partnership offers a simple way to get started; it is similar in many ways to going the sole trader route for an individual.
A partnership is merely a vehicle linking two or more self-employed people in a simple business structure. A partnership doesn’t have a separate legal status. If you want your new business to be a distinct legal entity you should consider forming a limited company.
As a partnership, you will not need to notify Companies House, nor deal with any administrative or accounting requirements which are required of limited companies.
It’s important to know that the individual partners within a partnership are personally liable for any debts incurred in the running of the business. This wouldn’t be the case if the business was a limited company.
Partnerships – tax matters
When you start the new business, each partner will need to inform HMRC that they are now self employed.
Each of the partner’s business income is counted alongside their existing personal income, so the accounting side of the partnership should be straightforward.
In terms of accounting, you will need to submit an annual self assessment form to HMRC and keep accurate and up-to-date records of all business transactions and accounts.
The partnership itself will also have to submit an annual self assessment form as well as one for each partner. You will pay income tax and national insurance contributions on the profits the partnership makes.
All partners will need to register with HMRC for self assessment tax, and the partnership itself will also need to be registered.
You can find out more information about this and the relevant forms; SA400, SA401 and SA402 here.
We recommend contacting an accountant before starting a partnership – they will be able to go through the registration process with you, and answer any tax questions you may have.
Partnerships – choosing a business name
When choosing a name for your new partnership, you must ensure that it is not ‘offensive’, or that it contains any ‘sensitive words’ such as ‘Council’, ‘Chartered’, ‘Authority’, or other terms which may imply the business has some kind of special status when it does not.
You must also avoid using trademarked terms in your business name, such as ‘Microsoft computer services’.
As sole traders and partnerships are not incorporated, you may not use the terms ‘ltd’, ‘limited’, ‘plc’, etc.
Naturally, you’ll want to avoid using the same name as another business. As there is no central database of partnership names in the UK, we recommend you search the net and browse local business directories to avoid using a name used by another business.
Partnerships – legal issues
It is worth bearing in mind that 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.
Although most people enter partnerships with the best of intentions, problems can occur later down the line – particularly if one partner wants to pursue a different course for the business, or wants to leave the partnership. For this reason, you should always draw up a deed or partnership which details how the business will be run, including how much each partner invests, how they intend to work together, and how to deal with changes to the partnership.
In the absence of a deed of partnership, the Partnership Act 1890 is used to legislate issues which may arise, the terms of which may well be unsuited to the way you run your business in practice
As setting up in business is an important decision to make, we recommend you talk to a local accountant before taking the plunge. They will be able to advise you on tax basics, as well as how to inform HMRC that you have started a new business.