You are starting a business but instead of going it alone you partner up. A business partnership is a great idea. You share the journey and its ups and downs including responsibility, liabilities and profit. As with any partnership, the big question is how to make it work or at the very least, how to avoid the worst pitfalls?
Business Partnership Agreement
A business partnership may be set up to run a traditional business; but may also be used to hold business investments like land or a race horse. A formal partnership is not required when the only jointly owned asset is rental property, and not expected if the partners in that property are husband and wife or civil partners.
Hence a business partnership is set up to run a successful business enterprise, whether the business is a trade, profession or investment, sharing the risks, profits and liabilities.
In a business partnership, two or more people go into business together. As they will share all responsibilities, liabilities and profits generated by their business, this simple definition alone shows us that there is enormous scope for conflict: Who is responsible for what? Who has to pay for what and when? What share of profits will each of the partners receive? What happens when one of the partners wants out or dies – will the business be dissolved or carry on?
To ensure as smooth a journey as possible, you need to draw up a written partnership agreement that sets out all partners’ rights, responsibilities and liabilities; that minimises misunderstandings and provides guidance in the event of a disagreement among the partners. Should the business look for outside funding, such an agreement will also provide the stability and clarity potential investors require.
The safest way to avoid this journey becoming a trip through a minefield is to seek professional advice before drawing up your partnership agreement. After all, the purpose of such an agreement is to settle these and other issues that may arise in your specific line of business, as much as possible in advance, rather than create even more scope for litigation. A clause stipulating conditions on how to modify the agreement should also be included.
If you do not sign a partnership agreement, the Partnership Act 1890 defines the terms of the partnership.
Types of Business Partnership
For most purposes, the following 3 types of business partnership will satisfy any requirements:
- Ordinary (General) Partnership
- Limited Partnership
- Limited Liability Partnership (LLP)
In an Ordinary or General Partnership, two or more individuals are the co-owners of a business. All partners share the profits of the business and, in analogy to a Sole Trader; there is no limitation of liability. All partners are jointly and severally liable with their personal assets at risk for all debts and liabilities.
An Ordinary Partnership has no separate existence in law. The partners must designate a Nominated Partner who must register the partnership with HMRC for Self Assessment and who will be responsible for managing the partnership’s annual tax returns and keeping business records. The Partnership must be registered before the 5th of October of its second year of trading.
The Nominated Partner has to report to HMRC annually, the profits of the partnership and how that profit is split between/allocated to each partner for tax purposes. The partnership agreement should specify the mechanics but there are complicated rules to follow, so the assistance of an accountant here is a good idea.
Partners are individually responsible for tax on their income, including their share of profits, and National Insurance contributions. They too must register for self-assessment and submit returns.
Regulations on VAT apply to partnerships as to any other business.
A Limited Partnership has at least one General Partner and one Limited Partner. It sits half way between an Ordinary Partnership and a Limited Liability Partnership. The major difference is the way the two types of partner are liable. While the General Partner has the same responsibilities and liabilities as a partner in an Ordinary Partnership, the Limited Partner’s liability is limited to the amount invested.
For tax purposes, there is no difference between a Limited Partnership and an Ordinary Partnership – see above.
All partners are individually responsible for registering for self-assessment, tax on their income and National Insurance contributions.
Limited Liability Partnership (LLP)
Just like a Limited Company, partners in a business that has been established as a Limited Liability Partnership (LLP) enjoy the protection of their personal assets from business debt and liabilities. Partners’ liability is limited to the funds they personally invested and any personal guarantees they provided to secure finance.
LLPs must have a Partnership Agreement defining each member’s rights and responsibilities. As liability is limited, partners are not held responsible for liabilities incurred by other members.
Administrative requirements are similar to those faced by Limited Companies. Each LLP must designate at least two partners who are legally responsible for registering the partnership at Companies House and for timely filing of the annual accounts and the annual report with Companies House. As a LLP is incorporated, it has a continuing legal existence independent of its members.
Partners are responsible for preparing statutory accounts that conform to regulations and filing those accounts with Companies House within 9 months of the LLP year end. These accounts have a special format and we recommend the assistant of an accountant like DNS Group to compile accounts for submission.
These statutory accounts must also be filed, electronically, with HMRC along with the partnership tax return.
For tax purposes, there is no difference between a LLP and an Ordinary Partnership – see above… Each partner must pay income tax on their share of any profits, irrespective of whether or not the profits are actually distributed. All partners are self-employed and must register for self-assessment within three months of starting up.
In the United Kingdom LLPs are governed by the Limited Liability Partnerships Act 2000 (in Great Britain) and the Limited Liability Partnerships Act (Northern Ireland) 2002 in Northern Ireland.
If you still have any query regarding setting up business partnership, please call us on 020 3500 2646