If two or more people wish to go into business together and don’t want 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 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.
The partners in a business partnership are usually self-employed individuals. However, it is also perfectly acceptable for a limited company to be one of the partners in a partnership.
When forming a partnership, one of the partners must be designated as the ‘nominated partner’. The nominated partner is responsible for registering the partnership with HMRC.
You can register with HMRC online here or by completing the paper form SA400, which you can access here. When a new partnership is registered, the nominated partner will be automatically registered with HMRC for self assessment tax.
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.
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 – 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 partnership agreement 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.
If you don’t have a deed of partnership, the Partnership Act of 1890 could end up being used if there’s a problem. However, this won’t necessarily protect you, so it’s vital to make sure you’re covered before you even start out.
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.
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 that 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.
More help on the different business structures
Deciding on which business structure to use for your new business is an important step when you are starting up. For more guidance on the different options, read these other ByteStart guides;
- What is a Sole Trader?
- 5 Things you Must Do When you Go Self Employed
- 10 Advantages of Running Your Business as a Limited Company Over Being a Sole Trader
- How to Set Up a Limited Company
- Set Up a Limited Company or Be Self-Employed?