Partnership – What is a partnership?
A partnership is a type of business structure in which two or more parties share ownership of the business.
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In the UK, there are different kinds of partnerships: general partnerships, limited partnerships, and limited liability partnerships (LLPs).
For each kind of partnership, there are specific rules about the roles of each party, the extent to which parties are responsible for the partnership's finances and how the business should be registered.
Within a partnership, the parties that share ownership are known as partners. Partners don’t need to be actual people, and organisations that are distinct ‘legal people’ (such as limited companies) can become a partner in a partnership.
Roles and responsibilities of partners
The roles and responsibilities of partners can vary according to which type of partnership they run and which type of partner they are.
Roles of partners in general partnerships
General partnerships consist of two or more partners, one of which is a ‘nominated partner’. Nominated partners are responsible for filing the partnership’s tax returns and keeping financial records.
Roles of partners in limited partnerships
Limited partnerships have two types of partners: limited partners and general partners. Limited partnerships must have at least one limited partner and at least one general partner.
Limited partners make financial contributions to the partnership when it’s set up, and they can’t remove their contribution. Whereas limited partners don’t manage the business, general partners control and manage the business, and they can make binding decisions on the partnership’s behalf.
Roles of partners in limited liability partnerships
Limited liability partnerships consist of two or more members. Every LLP has at least one ‘designated member’, who has more responsibilities than regular members. Among other things, designated members are responsible for:
Registering the partnership for Self Assessment
Keeping financial accounts and filing annual accounts
Registering for VAT if necessary.
When establishing a partnership, partners usually draw up a written ‘partnership agreement’ that outlines their rights and responsibilities. Partnership agreements can cover:
Each partner's specific responsibilities
How much capital each partner should contribute
How to distribute profits
How to add new partners
The leaving process for existing partners
If a partnership doesn’t establish a formal written agreement, the Partnership Act 1890 will apply.
How do I register a partnership?
The process of starting and registering a partnership depends on which type of partnership you want to register.
To set up a general partnership, the nominated partner must register for Self Assessment, either online or using the SA400 form.
When you register a limited partnership, you must complete an application form. The form must be signed by all partners and then sent in the post. You must also pay a fee of £20. It can take up to five days for Companies House to register your limited partnership, but you can pay more to get same-day registration.
When you set up a limited liability partnership, you’ll need to register with Companies House. You can do this by post, using approved software, or through an agent. Once your LLP is registered with Companies House, you’ll be sent a certificate of incorporation.
When you incorporate your LLP, you’ll need to register an address and choose a business name, which must end with ‘Limited Liability Partnership’ or ‘LLP’.
Liability in partnerships
Liability is the extent to which individuals can be held accountable for a business’s financial losses. Within partnerships, the amount of liability partners have depends on which type of partnership they own.
Within a general partnership, all partners are liable for a business’s finances. This means that partners share any profits generated by the partnership, as well as any losses and debts – even if these debts are more than they’ve personally invested in the business.
Within a limited partnership, the amount of liability someone has depends on the type of partner they are. On the one hand, limited partners can only be held liable up to the amount that they invested; in other words, they have limited liability. On the other hand, general partners have unlimited liability and may need to cover any debts the business incurs.
As the name suggests, partners in a limited liability partnership have limited liability and can’t lose more money than they first put into the LLP.
Taxes and partnerships
Unlike profit generated by limited companies, profit generated by partnerships isn’t subject to corporation tax. Instead, individual partners pay Income Tax on their share of the partnership’s profits.
Partnerships and Self Assessment
While only partners pay Income Tax, both partners and partnerships need to register for Self Assessment. The partnership’s Self Assessment tax return helps calculate the total income, profit, and loss, and these figures are then allocated according to how much of the profit partners are entitled to.
Nominated and designated partners are responsible for registering the partnership for Self Assessment, while all other partners are only responsible for their own tax returns.
Partnerships and VAT
If you run a partnership, you might need to register for VAT. It’s compulsory to register for VAT if you have a VAT taxable turnover above the VAT threshold, which is currently £85,000. If your taxable turnover is less than £85,000, you can voluntarily register for VAT.