When you start a business (or if you expand a current business) you have a choice as to what business structure to operate under, a partnership being one of those structures.
A partnership is a business which is owned and managed by more than one person. The partners are jointly responsible for all aspects of the business and will share the profits.
Sole trader: This business structure is for individuals who set up on their own (a one-man band), it includes people who work in the building trade, such as plumbers, electricians and joiners, but can also include people working in service industries, such as hairdressers, IT consultants or bookkeepers.Find out more
Partnership: This business structure is for two or more individuals who work in business together. Partnerships were set up for professions such as doctors, dentists and solicitors but they cover a wide variety of other industries such as the building trade and beauty providers. Partners are jointly responsible for all areas of the business and will often specialise in a particular area.Find out more
Private limited company (Ltd): The owners of a business (whether they be sole traders or partnerships) may decide to form a private limited company at any time. It could be from the date the business starts, or any point in time once the business has been established. Private limited companies must have at least one director and one shareholder, in a small business they are often the same person.Find out more
There are a number of questions to be answered before deciding on whether or not to choose a partnership as a business structure:
Entering into a partnership with one or more people should mean that a business can offer more specialisms and the workload should be spread amongst the partners. Although profits must be shared, it should be easier for partners to have time off and they can share and pool ideas.
A partners’ income is calculated in the following way:
Calculate the partnership profit
In the partnership accounts allowable business expenses are deducted from the income to arrive at the profit.
Split the profit – example one
The profit is split between the partners in accordance with their agreement. This may simply be an equal share to each partner.
For example, in a three partner business the profits will be split as follows:
|Partner A's share||20,000|
|Partner B's share||20,000|
|Partner C's share||20,000|
Split the profit – example two
The profit is split between the partners in accordance with their agreement.
For example, in a four partner business the partnership agreement states that the split is:
Partner A - £10,000
Partners B and C – 45% each of the remaining profits
Partner D – 10% of the remaining profits:
|Partner A's share||10,000|
|Partner B's share||22,500|
|Partner C's share||22,500|
|Partner D's share||5,000|
Partners will pay income tax on their share of the profits (the rate and amount will be dependent on whether or not they have other sources of income).
If the business fails you may be liable for the debts of the other partners, therefore it would be advised to seek legal advice before entering into a partnership.
Part of the process of setting up your business as a partnership is registering the partnership correctly. Here we give you a guide to the process of registering an ‘ordinary’ business partnership.Read more
If you are self-employed (including partners) you will be required to pay towards certain state benefits. Partners will usually pay national insurance contributions on their share of the profits.Read more
Register or Login to add this article to your reading list.