A partnership is a business structure where two or more people are responsible for running a business and any profits it generates. Operating as a partnership can have several advantages, including tax efficiency, compared to other business structures like being a sole trader or setting up a limited company, including SPV. In this guide, we'll explore the main types of partnerships available in the UK and answer important questions about running your business as a partnership.

Types of Partnerships

  1. Ordinary (or General) Partnership: The most common type of partnership involves two or more individuals running a business together. Like sole traders, partners in an ordinary partnership are personally liable for all business responsibilities and debts. The partnership is not a separate legal entity, meaning all partners are accountable for the business's legal matters and financial obligations.

Partners must choose a nominated partner responsible for submitting partnership tax returns and maintaining business records. It's common for partners to create a partnership agreement that outlines each partner's responsibilities, profit distribution, decision-making processes, and procedures for when a partner leaves.

Strengths of an Ordinary Partnership:

  • Relatively easy to set up with fewer administrative duties compared to other business structures

  • Lower accountancy fees as there is no involvement with Companies House

  • Privacy can be maintained since accounts and personal information do not need to be disclosed publicly

  • Shared responsibility can spread risk and the pressures of running a business

Weaknesses of an Ordinary Partnership:

  • Partners are personally responsible for any business debt, putting their assets at risk.

  • If one partner can't pay their share of the debt, the remaining partners must cover all partnership debt.

  • Partnerships cannot access finance as a business because they are not separate legal entities.

  • Sharing responsibility means losing control, which can lead to disagreements affecting business performance and personal relationships.

  1. Limited Liability Partnership (LLP): A Limited Liability Partnership (LLP) combines aspects of a partnership and a limited company, giving the partnership its legal status. In an LLP, each partner typically has limited liability and is not personally liable for debts incurred by the partnership. This protects partners' personal assets from being used to pay partnership debts, which is an advantage over ordinary partnerships.

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An LLP can have a separate limited company as a partner and an individual partner. Profits from the LLP are divided among the partners, who must each complete their self-assessment tax return declaring their share of the partnership's profits. An LLP must have at least two designated partners responsible for:

  • Maintaining compliant accounting records

  • Fulfilling Companies House duties, including filing annual accounts and confirmation statements

  • Registering for VAT and submitting VAT returns

LLPs often have a partnership agreement that outlines rules for profit sharing, capital contributions, partner responsibilities, and procedures for when a partner leaves.

Strengths of an LLP:

  • Partners' personal assets are protected from partnership debt recovery due to limited liability

  • A company can be a partner, not just a person

  • The LLP can access finance as a business

  • Sharing responsibilities can support growth and reduce some risks

Weaknesses of an LLP:

  • More administrative obligations, such as filing with Companies House

  • Some privacy is lost as accounts and personal information are made public by Companies House.

  • Sharing responsibilities can lead to losing control in decision-making, potentially causing disputes and complications.

  • Higher accountancy fees due to extra filing obligations

Who Can Be a Partner?

An individual partner must submit their tax return and register to pay National Insurance contributions. A limited company can also be a partner and must pay corporation tax on its profits and declare them on its self-assessment return.

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Choosing a Nominated Partner

Once you've chosen your business name, you must decide who will be the "nominated partner." This person will serve as the communication link between HMRC and your business. If partners don't choose a nominated partner, HMRC will appoint one for you.

All partners' and business names must appear on any official business paperwork, not just the nominated partner's name. The nominated partner must register the partnership with HMRC by October 5th of the business's second year of operation or face fines for missing the deadline. The nominated partner is also responsible for maintaining thorough business records and filing the company's annual tax return.

Partnership Taxation

Income from an ordinary partnership is shared among the partners, and each partner is personally responsible for paying tax on their share of the profits. Partners must submit their self-assessment tax return, separate from the partnership tax return, and declare their partnership income. They must pay tax on any profits at the appropriate income tax rates, along with other sources of taxable income, to ensure their total taxable income is reported to HMRC.

VAT and Partnerships

If your partnership's taxable turnover is above the VAT threshold, you must register to pay VAT. Some partnerships register for VAT even if they have not reached the threshold, allowing them to claim back VAT payments. VAT returns must be submitted online and are the responsibility of the nominated partner.

Making Tax Digital and Partnerships

Making Tax Digital is a government program that introduced changes to how businesses store and submit information to HMRC. As of April 2023, the government still needs to confirm when partnerships will be required to comply with Making Tax Digital for Income Tax Self-Assessment (ITSA).

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Setting Up a Partnership

HMRC provides an online partnership registration process that requires signing in through your Government Gateway account. Alternatively, you can register a partnership offline by completing the SA400 form and mailing it to HMRC.

After processing your application, HMRC will notify you and provide a 10-digit Unique Taxpayer Reference (UTR) number for the partnership. HMRC expects all partners to individually register for self-assessment by completing form SA401 when they join a partnership.

Partnership Tax Return Deadlines

Most partnership tax returns are submitted online, but if you prefer to file on paper, you must download Form SA800. To submit forms online, you must purchase the appropriate software. After filing the partnership tax return, you must inform all partners of the losses and profits so they can include this information on their self-assessment tax returns.

Missing HMRC's deadlines for filing and payments can result in substantial fines, which all partners are liable to pay, not just the nominated partner. The deadlines for filing partnership tax returns are the same as for individual self-assessment:

  • October 5th: Register for Self-Assessment

  • October 31st (midnight): Paper submissions

  • January 31st (midnight): Online submissions

  • January 31st (midnight): Payment for that year is due

All records supporting your tax return must be kept for four years after January 31st, following the end of the relevant tax year.

Working with a Partnership Tax Return Accountant

Partnership accountants can help manage your partnership accounts, bookkeeping, and the completion of your partnership tax return. Your accountant will report the required figures to each partner for their self-assessment tax returns and can complete each partner's tax return after finalizing the partnership tax return. If you need support setting up a partnership agreement, our tax accountant can provide initial guidance on where to start.

Partnerships are a flexible and potentially tax-efficient business structure for multiple people to share responsibilities and profits. Consider the different types, strengths, weaknesses, and tax obligations to decide if it's the right choice for your business.

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