By Jeff Macklin
A partnership is a simple and flexible way for two or more people to own and run a business by sharing the profits, managing the burdens and carrying the risks.
How these responsibilities are divided depends on the partners involved in the venture. These can be general partners, sleeping partners or companies.
• General partners invest in the business, take part in running the day-to-day and sharing in the profits. They are fully liable for any debts that the partnership may have. This means they could lose more than their initial investment if the business doesn’t perform well and their personal assets could be at risk. Every partnership must have at least one general partner.
• Sleeping or dormant partners invest money in the business and share in the profits, but don’t take part in running it. They are still fully liable for the partnership’s debts.
• Companies have the same rights and responsibilities as other partners, as well as some additional tax and reporting obligations.
Each partner is personally responsible for paying income tax on their share of any profits made. In most cases the partnership’s officers will be self-employed, so each member must include details of any profits they get from the partnership on their individual self-assessment tax returns each year.
If a partner is a company, it must pay corporation tax on its profits from the partnership, and should include the profits on its self-assessment return for corporation tax.
Another form of partnership – a Limited Liability Partnership (LLP) – shares many of the characteristics of a regular partnership, but it also offers reduced personal responsibility for business debts.
The LLP itself is responsible for any debts that it runs up, not the individual partners. This means that members have some protection if the business gets into trouble.
An LLP is ‘tax transparent’ or ‘pass-through’, this means the partners pay tax on their gains or income that they receive through the LLP but the LLP itself pays no tax.
Checklist: setting up a partnership
• Display all the partners’ names at all your business premises together with the address to which official documents should be sent.
• Display all the partners’ names on your business website and stationery along with your principal place of business.
• Each individual partner must register as self-employed with HM Revenue & Customs (HMRC).
• Contact HMRC to register your partnership’s existence and register for VAT if you expect a turnover of more than £67,000 a year.
Jeff Macklin is Non-Executive Chairman of FDUK, providing experienced part-time finance directors to fast-growing businesses across the UK – www.fduk.co.uk