A general partnership is a way of operating a business with two or more people or corporate members. Just like any other business structure, they can come in all shapes, sizes, and industries, from manufacturing to not-for-profits.
Although a partnership can feel like a limited company in terms of people collaborating for the same business, the tax process and personal liability is different. In this article we’ll explain what general partnerships are, and how they’re taxed. You can also find more guides and templates for partnerships in our resource centre.
What is a general partnership?
An ordinary (or ‘general’) partnership is where two or more people or other organisations band together to carry out business.
Do general partnerships need to be registered?
Yes, the nominated partner (the partner responsible for admin) must register the partnership for Self Assessment with HMRC.
Do I need a partnership agreement?
They’re not mandatory for general partnerships, but it’s always useful to create a written agreement in advance to minimise any issues or disputes in the future. It should include details such as:
- Who the partners are
- Who is responsible for what, and what level of control they have
- How to divide the profits
- What to do in the event of a death in the partnership
- How it can be terminated
- What happens if there is a dispute
Who can be in a general partnership?
A general partnership can have an unlimited number of partners which can be real people (often called ‘natural people’ in legal terms), organisations, or a combination of both. In fact, the partners in a partnership could consist of limited companies, a few individuals, and even other partnerships! This point is crucial for understanding how partnerships pay tax (which we’ll get too shortly).
Corporate bodies, public organisations, or charities and not-for-profits might all get involved in a partnership for a variety of reasons. For example:
- To collaborate on a particular project
- Public bodies such as local councils sometimes set up a partnership to help with shared services, such as procurement or service delivery
- Lenders or grant-making organisations may want to become part of the management team if they advance funds to a partnership
Do the partners need to register separately?
Yes, each partner will need to tell HMRC they are involved in the partnership as well as making sure the partnership itself is registered, so HMRC know they’re part of the business.
How do partnerships pay tax?
General partnerships do need to submit SA800 Partnership Self Assessment tax returns, but they don’t pay tax. Submitting a return simply allows HMRC to see what’s going on with the partnership in terms of profits and costs, who the partners are, and what their share is. But HMRC doesn’t expect the partnership to pay tax based on this.
Instead, partnerships are ‘transparent’ for tax purposes.
The partnership submits a return and HMRC ‘look through it’ to what the partners are earning from the partnership. It’s then up to the partner to declare their share of the profits on their own tax return, and pay tax. For example:
- A partner who is an individual real (natural) person will include their share of the profits on their own personal Self Assessment return, which is used to work out how much income tax and National Insurance they owe
- Partners which are limited companies include their share of the profits in their company accounts, and report it as part of their Company Tax Return (so they’ll pay Corporation Tax on their share)
Capital Gains Tax in general partnerships
Partners also need to be aware of Capital Gains Tax on disposals. In the same way a company owner may need to pay Capital Gains Tax when they sell shares in their business, a partner may be liable for Capital Gains Tax when they sell their interest in a partnership. It can also be payable if the partnership takes on a new partner, and they pay a premium to join.
Can you be in a partnership and still pay PAYE?
There are two ways members of any type of partnership might find themselves paying PAYE. One reason is that members of Limited Liability Partnerships can be classed as salaried members, drawing a monthly income, and paying tax and National Insurance just like a regular employee.
The second is where a person is employed in one business, but is also a partner in a different business which is a partnership. This is perfectly acceptable as long as it isn’t a way of reducing the amount of tax and NICs they must pay. In this case, the taxpayer would fill in a Self Assessment return that includes both the employed and partnership sections.
Tax can be confusing at the best of times, particularly in partnerships! Learn more about our online accounting services, call 020 3355 4047 to speak to one of the team, or get an instant online quote.
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