Navigating business partnerships: Is it the right move for you?

Why consider a business partnership? 

Starting a business as a partnership can be very beneficial. Launching an entrepreneurial venture with someone else allows you to pool your resources and skills which can lead to a stronger and more successful business. 

Running a business with a partner, or partners, means you can also benefit from their emotional, technical and practical support. 

On the downside, running a business with others can cause complications over who is responsible for what and the level of ownership of the business. That’s why having a formal partnership agreement in place is important.  

Key features of an ordinary business partnership 

An ordinary partnership is the simplest form of business partnership. Key features include: 

• Simplicity: Easy to set up and get started. 
• Taxation: Partners pay income tax on their share of the profits. 
• Liability: Partners are personally responsible for business debts. 

Setting up an ordinary business partnership 

To set up an ordinary business partnership, you need to appoint a ‘nominated partner’ who is responsible for managing the partnership’s tax affairs, record keeping and submitting the partnership’s annual tax return. 

The nominated partner must register the partnership with HM Revenue & Customs (HMRC) by 5th October in the business’ second tax year. If this deadline is missed, you may face a penalty.  

For example, a business that commenced on 1st April 2024 will need to register with HMRC by 5th October 2025. 

If you are unable to register the partnership online, you can sign up by post using the SA100 form. 

Individual partners must also be registered for self-assessment and submit an annual self-assessment tax return.  

Although it is not a legal requirement, it is recommended that you work with a solicitor to draw up a legally binding written partnership agreement that outlines the roles and responsibilities of each partner. The agreement will also detail profit sharing and what happens if a partner decides to leave the partnership. 

Without a partnership agreement, there could be misunderstandings among the partners over roles, responsibilities and ownership.  

What to include in a partnership agreement 

The key details to include in a partnership agreement are: 

• Profit and loss sharing: Outline how profits and losses are allocated to each partner. 
• Decision making: Outline how decisions affecting the partnership are made by partners. This could be through unanimous agreements, a majority vote or specific decisions allocated to specific partners. 
• Dispute resolution: Provides details of the procedures you will follow to tackle disputes and disagreements between partners. Examples include using arbitration or mediation services. 
• Roles and responsibilities: Define the specific roles and responsibilities of each partner. 
• Intellectual property rights: Outline how ownership of the partnership’s intellectual property is distributed between the partners. 
• Changes in partnership: Detail how assets and liabilities will be distributed if a partner withdraws or retires from the partnership, or if the partnership is dissolved. 

Is a limited liability partnership (LLP) right for you? 

A limited liability partnership (LLP) is similar to an ordinary partnership in that the partners share in the risks, costs, responsibilities and profits of the business. It's also important to have a partnership agreement in place for an LLP. 

The main differences are: 

• The liability of partners in an LLP is limited to the amount of money each partner has invested in the business and to any personal guarantees they have given to raise finance. This means partners have some protection if the business runs into trouble, unlike in an ordinary partnership for which there is no limit on the partners' liability if the business becomes insolvent. 
• The annual accounts for an LLP must be filed with Companies House and are available for public access on the register. LLPs must also keep a register of members up to date, and submit a confirmation statement each year to Companies House. 

Many professional practices such as accountants and solicitors use an LLP structure for their business. 

Key features of an LLP 

The key elements of a limited liability partnership are: 

• Separate legal entity: An LLP exists as a separate legal entity to the partners. 
• Limited liability: The liability of the partners is limited to the amount of money each partner has invested in the business. 
• Registration: An LLP needs to be registered with Companies House. When registering you must provide an ‘appropriate’ registered office address and email address.
• Designated and ordinary members: An LLP must have always at least two designated members. They have more responsibilities than ordinary members, including: 
  • registering the business for self-assessment with HMRC 
  • keeping accounting and other business records 
  • appointing an auditor if one is needed 
  • preparing, signing and sending annual accounts and a confirmation statement to Companies House 
• Taxation: Each member pays income tax on their share of the LLP’s profits. The LLP itself does not pay any tax. 

Deciding between an ordinary business partnership and an LLP 

There are several things to consider when deciding whether to set up an ordinary partnership or LLP. 

An ordinary partnership is the quickest and easiest to set up. There are also few rules and regulations you need to comply with. Unlike an LLP, you don’t need to register an ordinary partnership with Companies House or submit annual accounts.  

Although it is simple to set up, an ordinary partnership is not a separate legal entity to its partners. This means you are fully responsible for business debts so your personal assets could be at risk if the business has financial difficulties.  

LLPs have more formal requirements and legal responsibilities compared to ordinary partnerships, so this is also something you’ll need to consider.  

To work out whether an ordinary business partnership or LLP is the right option for you, get expert advice from an accountant.  

Other business structures 

A partnership is not the only business structure open to you. You could also choose: 

Sole trader: A self-employed individual trading as a business on their own. The individual and the business are one entity which means you are fully responsible for business debts. It is simple to register as a sole trader, with no requirement to register with Companies House.  

Limited company: A limited company is a separate legal entity that operates independently from its owners. It has several more formal requirements than sole traders, including registering with Companies House, paying Corporation Tax and submitting annual accounts.  

Read a guide to registering as a sole trader or limited company here. 

TaxAssist Accountants can help 

When deciding whether a partnership is right for you, you need to think about what’s important for your business and make an informed decision.  

We have extensive experience helping business owners understand their options and we can help you to reach a decision.  

Call TaxAssist Accountants on 01384 900 633 or use our online contact form to book a free video or face-to-face consultation. 

Date published 4 Jul 2024 | Last updated 4 Jul 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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