A general partnership is a way of operating a business with two or more people or corporate members. Just like any other business, there are a wide variety of partnerships covering a range of sectors, from the services industry, to manufacturing, to not-for-profits.
What makes general partnerships slightly odd is that although they might feel like a limited company in terms of people collaborating for the same business, the tax process is different.
In a limited company, directors usually take a low salary, and receive the rest of their income as dividend payments. In a partnership, the partners declare and pay tax more like the way a self-employed person would. In other words, through the Self Assessment system.
Just like self-employed sole traders, they will also pay class 2 and class 4 National Insurance. Although they could be working as a partner in a very large business, they are taxed almost as though they’re going it alone.
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.
A general partnership can have an unlimited number of partners, and they can be either real people, or organisations. Each partner will also need to register as well as the partnership itself, so HMRC know that they’re part of the business.
Partners in a general partnership can be general partners that take part in the day-to-day operations of the business, or silent or sleeping partners who retain only an investment interest but don’t work in the partnership as such.
Do I need a partnership agreement?
They’re not mandatory for general partnerships, but it’s always useful to set out an agreement in advance. It should include details about who the partners are, how to divide the profits, as well as who is responsible for what, and what level of control they have.
A partnership agreement will also set out what happens in the event of a death in the partnership, how it can be terminated, and what happens if there is a dispute.
It is highly advisable to put a partnership agreement in place, otherwise you may find yourselves in difficulty if things go wrong.
Mixed member partnerships
Although the majority of partnerships are between real people (often called ‘natural people’ in law), partnerships will sometimes include one or more partners who aren’t ‘natural’ at all.
Typically, these bodies will become involved with partnerships where they are aiming to achieve a common goal. For example:
They may want to collaborate in order to complete 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.
Sometimes lenders or grant-making organisations may want to become part of the management team if they advance funds to a partnership.
Be aware that some people may be called ‘partners’, but not actually be members of the partnership. In the same way that someone may be given a job title as a kind of honorary or functional description, a ‘managing partner’ may not have any voting rights or a share of the profits.
Taxation and general partnerships
When it comes to partnerships and taxation in the UK, there is an important central idea and that is the concept of tax transparency.
Tax transparency means that the partnership itself isn’t a tax-paying entity.
This is in contrast to individuals and limited companies which are both taxpayers in their own right.
Who pays tax in a partnership?
In a general partnership, it’s the partners who pay tax on the profits, not the partnership itself. That is not to say that the partnership doesn’t have to make a return to HMRC.
The partnership itself will need to make a Self Assessment tax return to allow HMRC to see what profits have been made, who the partners are, and what their share is. But HMRC doesn’t expect tax based on this.
Instead, the partners each fill in their normal tax return, but with the partnership pages added.
If the partner is an individual, they will pay income tax and National Insurance on their share of the profits.
Partners also need to be aware of Capital Gains Tax on disposals. In the same way that a company owner may need to pay capital gains tax when they sell their business, a partner may be liable to capital gains tax when they sell their interest in a partnership.
Capital gains tax may 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 that members of any type of partnership might find themselves paying PAYE.
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.
Get help with tax in partnerships
Tax can be confusing at the best of times, and can seem particularly so in partnerships when partners might be individuals or other businesses. Add in the fact that the partnership itself must submit a return to HMRC but doesn’t actually get taxed, and you can see that the situation can get incredibly confusing.
If you’d like help with your partnership tax returns, or you want to talk about whether self-employment, partnerships or a limited company is the right way for you to go, then call us now and we’ll be happy to help!
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About The Author
I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.