If two or more people want to set up a business together, setting up a partnership is a fairly simple procedure. The partners will each have responsibility for the business, including any business debts which could put personal assets at risk if anything should go wrong. Prior to forming a business partnership, it is advisable to obtain professional advice so that a deed of partnership may be drawn up. The level of responsibility for each partner should be decided prior to the agreement being signed.
It is possible for anyone to form a partnership, including companies and limited liability partnerships. However, if a partner is below the age of 18, the partnership agreement isn’t legally binding until they reach the age of 18. Partners usually have an equal share of rights and responsibilities for a business, although this is dependent upon any partnership agreement and the type of partner. There are three types of partner and their rights and responsibilities depend on which type they are. A general partner will invest in the business, share the running of the business and take a share of its profits. General partners are also each liable for the business debts. There must be at least one general partner in each ordinary and limited partnership.
Limited partners don’t have any say in the daily running of the business. They only risk their initial investment and have no liability for the business debts. Sleeping partners will invest in a business and take a share of the profits, but don’t have any involvement in the daily running of the business. They have a liability for business debts which can put their personal assets at risk. If the members of a partnership are all limited companies, the companies have to prepare ‘partnership accounts’ and submit them to Companies House annually.
To avoid some of the potential problems that can occur in a partnership, it is advisable to set up a deed of partnership. This is a legally binding document which outlines the rights and responsibilities of each partner and how the business will be run. The deed will contain all the basic information of the partnership such as the names of partners and the name of the business, but will also set out other information. The deed will state the amount of capital that each partner contributes to the business, whether partners should be paid a salary, how profits and losses will be shared and working arrangements. The deed will also state how to recruit new partners and what to do if a partner wants to leave the partnership or dies.
A partnership which doesn’t have a deed will be governed by the Partnership Act 1890, although this doesn’t cover many of the problems that may arise within a partnership. A partnership may trade under a business name or the names of the partners. If the partnership doesn’t include the names of the partners, the names must be included on the business website and any stationery. However, if there are more than 20 partners the names don’t have to be listed, although the website and stationery should show the partnership’s main place of business.
Each partner of the partnership will receive a share of the profits and gains, with each partner having responsibility for their own tax. The partnership has to be registered with HMRC and each partner has to register for self-assessment and National Insurance Contributions. HMRC will provide a Unique Taxpayer Reference for the main partnership and each partner. A nominated partner will complete and submit the main partnership tax return to HMRC, while each partner has responsibility for their own tax return.
For advice about how to operate as a partnership see our guide, here.
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An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.