How to run a successful and effective business partnership

Ordinary partnerships made up 7% (365,000) of the UK private sector business population in 2023. The partnership business structure can be a perfect landscape for businesses to thrive. 

If you’re not sure a business partnership is right for your business, read our article here. 

This guide provides essential business partnership advice, from registering with HM Revenue and Customes (HMRC), managing finances and defining roles. 

What is a business partnership? 

A business partnership is an unincorporated business structure owned by more than one person. Different types of partnership include ordinary/general partnership, limited partnership and Limited Liability Partnership (LLP). Here we focus on the general partnership model. 

The highlights of a partnership are: 

• Simplicity: Partnerships are generally easy to set up and get started. 
• Shared responsibilities: Assigning partners with individual roles can share the workload and responsibilities between partners. 
• Diversified skills: Partnering with individuals of different backgrounds, experience and skills leads to a more varied leadership team. 
• Taxation: Partners are taxed on their business partnership profit share. 
• Liability: Business partners share liability for partnership debts and liabilities. 

Overview of partnership tax obligations 

Registering partnership with HMRC 

You can register a partnership with HMRC quite easily, and your accountant can set a partnership up with HMRC for you. 

The deadline for registration is by 5th October in the business’ second tax year. For example, a business that started on 1st July 2023 (2023/24 tax year) must register by 5th October 2024. 

Partnership tax return 

A partnership must submit a partnership tax return to HMRC by the deadline of 31st January. Each partner’s share of taxable profit is included on the partnership tax return.  

The partnership tax return does not include a tax calculation. A partner’s taxable profit share is included on their personal self-assessment tax return. 

Personal tax returns 

A partner in a business partnership must report their partnership earnings on their personal self-assessment tax return. You can learn more about self-assessment tax returns in our knowledge hub here. 

Taxable profit share 

The accounting profit will be split between the partners in their profit-sharing ratios. There is more about how profit shares are calculated later in this article. 

The accounting profit shares are adjusted for tax purposes including the removal of disallowable expenses and other tax adjustments. The taxable profit share is reported to HMRC using both the partnership tax return and the partners’ self-assessment tax return. 

Managing finances in a partnership 

Partnership bank account 

While it is not mandatory, it is important to have a business current account to keep track of all business transactions. 

Invoicing and chasing payments 

Invoicing customers quickly and including payment terms is important in keeping your cash flow positive. The sooner cash hits your bank account, the better. Following up on unpaid invoices is essential in making sure your customers pay for your services in good time.  

Keeping track of outstanding payments is easy with the use of digital accountancy packages. Some offer the opportunity to chase customer for payment at the touch of a button. 

Bookkeeping and management accounts 

As businesses grow, it becomes more practical to use digital accountancy packages to manage your bookkeeping. QuickBooks, Xero and Dext are all market leading software that makes it easy for you to: 

• Update your records easily with automatic bank feeds. 
• Use system learning and rules to easily enter transactions with minimal data entry. 
• View simple and clear reporting, including lists of unpaid invoices and a profit and loss account at the click of a button. 
• Attach digital copies of invoices and additional information, avoiding a build-up of paper records. 
• Have a secure and encrypted system backed up in the cloud. 

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) does not cover business partnerships, but it is expected MTD for partnerships will be implemented in due course. 

VAT registration 

A partnership must register for VAT when it meets the VAT threshold. You can also register a business for VAT if it is below the threshold if this is advantageous. 

 

Understanding profit sharing 

Profit sharing ratios are usually set out at the start of the business, or when partners join and leave. 

Profit sharing ratios can be determined by considering: 

• Working hours / working time commitment 
• Seniority of partner 
• Role of partner 

Where all partners do the same role and have the same seniority, but work different hours, the profit-sharing ratios would be shown as follows: 

Partner A – works 10 hours per week	10	Ratio - 2/14
Partner B – works 35 hours per week	35	Ratio - 7/14
Partner C – works 25 hours per week	25	Ratio - 5/14
Total	70

When partnership accounts are prepared, certain transactions may be treated differently. These are referred to as profit appropriations and are considered prior to sharing the residual profit between the partners using their profit-sharing ratios. For example, those that: 

• relate to one partner 
• should exclude a partner 
• should be shared in a different way

Capital investment 

New partners may be required to invest a fixed amount of capital as part of a ‘buy-in’. Following that, depending on the business plan and finances, it may be required that partners need to invest more capital in the business. Generally, it is possible to get a loan to cover this buy-in. 

Drawings 

Over time, leaving more capital in the business is possible by taking less drawings. Drawings are the amounts that partners take from the business as regular or one-off amounts and is the gradual withdrawal of their profit share. 

Partners do not pay tax on the amounts drawn, they are taxed on their profit share, regardless of drawings. 

Partners’ capital accounts 

Capital accounts summarise the total invested and capital balance owed to each of the partners at the end of the financial year. Generally, they are drawn up as follows: 

Capital account balance brought forward	£X
Capital introduced	£X
Capital drawings taken	(£X)
Capital account balance carried forward	£X

Often, there is an agreed amount of capital to carry forward and retain in the business. Once this amount is decided, the balance of capital remaining or being required in the business will be transferred to or from the current account. 

Partners’ current account 

Current accounts summarise the balance of earnings owed to each of the partners at the end of the financial year. Generally, they are drawn up as follows: 

Current account balance brought forward	£X
Capital introduced	£X
Profit share	£X
Regular and other drawings taken	(£X)
Current account balance carried forward	£X

Working capital 

Working capital is the amount that a business needs to run. With regular payments being made each month such as salaries and drawings, the business must ensure it has enough in the bank account to fund these payments. 

Businesses should ensure they manage working capital successfully. Working capital can be managed by improving your cash flow cycle. Techniques for this include: 

1. Reduce the amount of time it takes your customers to pay by chasing for payment ahead of due dates. 
2. Look at pushing back the time it takes you to pay suppliers, either paying bills on their due date or negotiating increased terms with suppliers. 
3. Manage your stock efficiently, ensuring you are not over buying and stockpiling goods that could be purchased the following month. 

Roles and responsibilities 

Clearly defining roles in a partnership can help to avoid conflict and confusion between partners. Assigning partners with responsibilities will mean that they take ownership and therefore are more likely to prioritise and get something done. 

These roles can include: 

• Finance lead 
• HR/employee lead 
• Operations lead 

Communication and meetings 

When it comes to communication, it is important to have open and honest discussions with your fellow partners and work to keep your relationship working well.  

Regular meetings can help keep communication flowing and finding a balance with productivity is also important. Maintaining an agenda for the meeting and making action points assigned to individuals will help make meetings more effective. 

Business plan

Having a detailed and up-to-date business plan keeps focus on objectives and keep those goals aligned throughout the partnership. 

Learn more about what a business plan should include in our guide here. 

Partnership protection 

Business partnership protection insurance supports business partnerships if a partner passes away or has a serious illness. The cover gives the continuing partners the funds to purchase the business share of the affected partner. Businesses can seek advice on insurance options from a financial adviser. 

 

 

Date published 7 Aug 2024 | Last updated 7 Aug 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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