Partnerships

By Mahmood Reza

Partnership

If you want to go into business with one or more people, then a partnership is an option to consider.

This is where two or more people set up a business together and share the risks, costs, profits and decision-making on an agreed basis.

A word of caution

Each partner is self-employed and personally responsible for all debts run up by the partnership as a whole.

However, they are therefore treated as individuals for tax purposes, so have to register for self-assessment in the same way as a sole trader.

Requirements & Obligations of a Partnership

A written partnership agreement is highly recommended (often called a deed of partnership), as much to introduce clarity into the business relationship and to prevent misunderstandings at a later date.

This may include:

The responsibilities of each partner,
Any cash or assets they are bringing into the business,
The income they expect to take, and
The split of profits between the partners

Legal Status of a Partnership

A partnership is not a separate legal entity from the individuals, therefore any debts incurred by the business are also debts for the individual partners, and the partners are jointly and severally liable for the debts.

This means that if one of the partners runs up debts through the business which they cannot afford to repay, then all the partners can be pursued to pay the debt.
It is therefore important to maintain good working relationships between the partners, be able to trust each other and maintain reliable business systems.

Advantages of being in a Partnership

The responsibility for running the business is shared and the bringing together of complementary skills can improve the business’ chance of success.
There are potential (tax) cash flow benefits, especially if you think there will be trading losses in the start-up period.
Risk s spread amongst the partners

Disdvantages of being in a Partnership

It is not a separate legal entity
Partners are jointly and sverally liable for debts incurred by the parnership
The requirements for Income Tax, National Insurance and VAT are the same as for sole traders.

Limited Liability Partnership

A Limited Liability Partnership (LLP) shares many of the features of a normal partnership - but it also offers reduced personal responsibility for business debts.

Unlike members of ordinary partnerships, the LLP itself is responsible for any debts that it runs up, not the individual partners.
The main difference is that an LLP has the organisational flexibility of a partnership and is taxed as a partnership.
In other respects it is very similar to a private company.

Additional Information about Limited Liability Partnerships

Partnerships enable individuals to spread risks in several ways; decisions can be taken with the benefit of input from at least two persons, enabling a broader perspective to be taken of the issues concerned.
The business can fall back on the financial resources of more people, and there is also the possibility of tapping more sources of capital. Bigger, established partnerships may be able to attract venture capital, not normally available to a sole trader.
Most partnerships have a spread of skills and abilities not available to sole traders. There is also less likelihood of business failure due to illness or other inability to work, as other partners may be prepared to take on more work temporarily to avert a crisis.
A partnership has many of the issues common to sole traders.
Tax is also a consideration and as a general rule of thumb where taxable profits exceed £28,000 per partner the tax burden will be greater than for a limited company.

Advantages of being in a Limited Liability Partnership

The responsibility for running the business is shared.

The business can fall back on the financial resources of more people.

There is less likelihood of business failure due to illness or other inability to work, as other partners may be prepared to take on more work temporarily to avert a crisis.

Disadvantages of being in a Limited Liability Partnership

There is unlimited liability, unless a limited liability partnership is formed.
As a general rule of thumb where taxable profits exceed £28,000 the tax burden will be greater than for a limited company.
Many partnerships break down because those involved cannot agree on direction, objectives, and split of profits and/or workload.