Should I set up my business as a partnership?

A partnership can be an attractive option if you want to start or run a business with one or more other people.

The advantages of a partnership include:

• Shared responsibility. Partners can divide the workload and take responsibility for different areas of the business.
• Complementary skills and experience. Partners may bring different expertise, helping the business offer a wider range of products or services.
• Shared decision-making. Partners can support each other and contribute ideas to help develop the business.
• Shared costs and risks. The financial commitment and risks of running the business can be shared between the partners.
• Business continuity. It may be easier for the business to continue operating when one partner is unavailable, as other partners can help manage day-to-day activities.
• Simple to set up. Partnerships are generally easier and less costly to establish than a limited company.

Before entering into a partnership, it is important to agree how profits will be shared, how decisions will be made and what will happen if a partner wishes to leave the business. Because partners are generally jointly and severally liable for the partnership’s debts, it is also important to choose business partners carefully and put a written partnership agreement in place to help avoid misunderstandings and disputes in the future.

The disadvantages of a partnership include:

• Shared profits. Profits must be divided between the partners according to the agreed arrangements.
• Joint and several liability. In an ordinary partnership, each partner can be held personally responsible for the partnership’s debts. If one partner cannot pay their share, the other partners may be required to cover the full amount owed.
• Potential disagreements. Differences of opinion between partners can affect decision-making and the running of the business.
• Shared control. Major business decisions may require agreement from other partners.

Partners earn income through their share of the partnership’s profits.

The partnership calculates its profit by deducting allowable business expenses from its income. The resulting profit is then divided between the partners according to the partnership agreement.

For example, if a partnership generates income of £100,000 and has allowable business expenses of £40,000, the partnership profit would be £60,000.

The way this profit is shared depends on the agreement between the partners. In some partnerships, profits are divided equally. In others, partners may receive different shares based on factors such as their responsibilities, experience, capital investment or time committed to the business.

If there is no partnership agreement in place, profits are generally shared equally between the partners.

Each partner is responsible for paying tax on their share of the partnership’s profits.

Partners normally pay Income Tax through Self Assessment and may also need to pay National Insurance contributions, depending on their profit levels and personal circumstances.

The amount of tax a partner pays will depend on their share of the partnership profits, any other sources of income they receive and the tax rates and allowances that apply for the relevant tax year.

The partnership itself does not normally pay Income Tax. Instead, each partner is taxed individually on their share of the partnership’s taxable profits, regardless of how much money they withdraw from the business.

Depending on your income and circumstances, you may also need to comply with Making Tax Digital (MTD) for Income Tax, which requires eligible taxpayers to keep digital records and submit information to HMRC using compatible software.

Because tax rules and allowances can change, it is important to check the latest HMRC guidance or seek professional advice if you are unsure of your tax obligations.

As a partnership, you must:

• register the partnership with HMRC
• submit a partnership tax return each year
• keep accurate business records
• register for VAT if the business exceeds the VAT registration threshold or chooses to register voluntarily
• inform HMRC of significant changes to the partnership, such as partners joining or leaving

In addition, each partner is responsible for:

• registering for Self Assessment (where required)
• submitting their own Self Assessment tax return
• paying any Income Tax and National Insurance contributions due on their share of the partnership profits
• complying with MTD for Income Tax (depending on income and circumstances)

Although partners may divide responsibilities between themselves, they remain jointly responsible for ensuring that the partnership meets its legal and tax obligations.

Business records should be kept safely and securely. HMRC has rules about how long records must be retained, and records may need to be kept for longer in certain circumstances.

In an ordinary partnership, the partners are generally jointly and severally liable for the debts and obligations of the business.

This means that if the partnership cannot pay its debts, each partner can be held personally responsible for the full amount owed. If one partner is unable to meet their share of a debt, the other partners may be required to cover the shortfall.

As partners are personally liable for the actions and decisions of the partnership, it is important to choose business partners carefully and to have a written partnership agreement in place that sets out each partner’s responsibilities and how the business will be run.

If your partnership is experiencing financial difficulties, it is important to seek professional advice as early as possible.