Partnership business is one of the most sought-after business structures in the UK. Especially for the entrepreneurs who bring a shared skill set to a single idea/business. As a name suggests, a partnership business structure includes two or more people who share equal/limited ownership, liabilities, responsibilities, and profits.
Whether you are launching a local venture with hopes to scale in the future, a professional service firm, or need to become a partner in a growing start-up, a partnership business structure is an ideal choice. Here’s what you need to know about it.
What Is a Partnership?
In a partnership, two or more people join to form a business structure where they can have shared responsibilities, liabilities, and profits. Such a business structure works best when you need a large amount of capital for your business idea, professional services firms and also for businesses run within a family. Allowing multiple people to combine resources, skills, and capital, it makes your business operations streamlined and easier.
Characteristics of a partnership business in the UK
The key characteristics of a partnership business structure are;
- Shared ownership – Each partner is either an equal or limited shareholder in the business (as per the agreement) and holds said power in controlling business operations as well as decision-making.
- Shared profits/loss – each partner gets their share of profits or loss as agreed.
- No separate identity – most of the partnership businesses in the UK offer no separate identity for the business and business owners (partners). This means that you don’t have personal assets immunity for business debts and losses.
- Joint operations – A partnership business cannot be run by a single owner’s ideas and decisions. All of the operations within it are joint, with all of the partners agreeing on a single point. Let it be marketing, finance, sales, customer support, taxes, etc.
Registration processes for partnership business
In the UK, you can start your partnership business by;
- Registering the business with HMRC first.
- Signing up for Self-Assessment (each partner).
- Filing an annual partnership tax return.
Types of Partnerships
There are three most common types of Partnership Business structures in the UK. Namely, Ordinary/General Partnership (GP), Limited Partnership (LP) and Limited Liability Partnership (LLP).
Ordinary/General Partnership (GP)
This is the most common type of partnership business in the UK. Within this structure, each partner holds an equal share and responsibility in the business, is personally liable for business inefficiencies, and can make decisions. It is most suitable for family-run businesses and professional collaborations like designers, consultants, etc.
Limited Partnership (LP)
A limited partnership is a mix of general partners and limited partners. General partners own, manage and hold responsibility for the business with unlimited liability risk. On the other hand, limited partners invest capital but have limited liability and disassociation with management. It is best for investment-focused businesses or businesses that need external funding without transferring control of operations.
Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is a more complex and hybrid form of partnership business structure in the UK. It’s a separate legal entity from its members and practices a more formal structure with reporting requirements. Members enjoy limited liability, but such a partnership business must be registered with the Companies House. This type of business structure is mainly adopted by professional services firms (law, accounting, etc.) and larger/growing organisations that seek liability protection.
Pros and Cons
Just like any other business structure, partnerships also have their pros and cons.
Pros
- Partnerships are easy to set up and register compared to limited liabilities and require minimal paperwork as well as legal compliance.
- Partnerships result in shared responsibilities within the business. Therefore, the workflow gets divided, and operations become more streamlined.
- Partnerships help in raising more capital as different partners pool in money in a single venture. So managing the finances, investing and growing isn’t a burden on a single person.
- Partnership businesses come with a flexible structure where you can define roles and responsibilities for each partner and adapt as per the business needs or market demands.
- Profits are taxed as personal income instead of revenue, therefore offering greater tax efficiency when compared to corporate taxation.
Cons
- Partnerships come with Unlimited liability. Even if it’s a mistake of one partner, others must also bear the costs with their personal assets.
- Since you get shared profits in a partnership structure, it translates to less personal income for every member.
- Conflicts and disagreements are a common thing between partners, which can affect the business operations in the long run.
- Compared to limited companies, partnerships have limited growth because they are less likely to attract investors and may face challenges securing huge contracts.
- There’s a lack of continuity in partnership businesses because if one partner retires, leaves or dies, the whole of the business may need restructuring.
Legal Responsibility
Running a partnership business in the UK requires understanding the legal responsibilities as well.
Liabilities
In a general partnership, each partner may be held jointly or severally liable for business loss, claims and/or debts. This puts your personal assets at risk as a partner.
In LLP, personal assets are immune to business debts, losses and claims as the LLP is a separate legal entity and is responsible for such things on its own. Plus, each partner in LLP is liable for the amount they invest.
Obligation to HMRC
All partnerships in the UK must;
- Register with HMRC.
- File annual partnership tax return.
- Submit a Self-Assessment tax return individually (each partner).
- Register for income tax, VAT, and/or National Insurance contributions (NICs).
Partnership agreements
Though signing a partnership agreement is not a legal necessity, it’s recommended to avoid conflicts later. It typically covers policies revolving around;
- Profit/ loss sharing among partners.
- Decision-making processes for the business.
- Roles and responsibilities of each partner.
- Dispute resolution protocols.
- Exit strategies.
In addition, each partner must.
- Work honestly.
- Hold himself responsible/accountable for the assigned duties.
- Avoid conflicts.
- Collaborate, not compete.
- Keep business confidentiality.