A partnership is governed by a deed of partnership and is a legally binding agreement between the partners who are in business together. It describes how the partnership will be run and the rights and duties of the partners themselves.
It’s not necessary to have a deed in order to set up a partnership, but it’s a good idea, as it can help to prevent misunderstandings and disputes. It may be a good idea to enlist a solicitor to ensure that each partner understands their responsibilities before the deed is finalised.
If the partnership does not have a deed, it will be governed by the terms of the Partnership Act 1890. This does not offer solutions to many of the problems that can arise and may not suit the way that you and your partners want to work together.
As well as giving basic information about the partnership, such as its business name and the names of the partners, the type of business and business address, the deed will usually set out:
- the amount of capital that each partner is to contribute to the business
- the way in which partners will share profits or losses, and whether any of the partners should be paid a salary
- working arrangements, such as how much time each partner should contribute to the business, who does what management tasks and what type of decisions need collective agreement between the partners
- changes to the partnership, such as how new partners can be appointed and what happens if a partner dies or wishes to leave
- Types of partner
- There are three main types of partner, each of which has different rights and responsibilities.
- General partners invest in the business, take part in running it and share in its profits. Each general partner is fully liable for any debts that the partnership may have. This means that they could lose more than their initial investment in the business if it runs into trouble, and that their personal assets could be at risk. Every ordinary and limited partnership must have at least one general partner.
- Limited partners are not permitted to participate in the day-to-day running of the business. Their debt is limited to the amount of their initial investment.
- Sleeping partners invest money in the business and share in its profits, but do not take part in running it. Like general partners, they are fully liable for the partnership’s debts.
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved – although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
- Each partner needs to register as self-employed
- It’s a good idea to draw up a written agreement between the partners.
Management and raising finance
- Partners themselves usually manage the business, though they can delegate responsibilities to employees.
- Partners raise money for the business out of their own assets, and/or with loans.
- It’s possible to have ‘sleeping’ partners who contribute money to the business but are not involved in running it.
Records and accounts
- The partnership itself and each individual partner must make annual self-assessment returns to HM Revenue & Customs (HMRC).
- The partnership must keep records showing business income and expenses and a set of accounts for the whole business will be prepared and the profit split in line with the profit sharing ratio detailed in the partnership agreement
Tax and National Insurance
- As partners are self-employed, they are taxed on their share of the profits.
- Each partner also needs to pay Class 2 and 4 National Insurance contributions.
- Creditors can claim a partner’s personal assets to pay off any debts – even those debts caused by other partners.
- In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt. Partners in Scotland are both jointly and severally liable.
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency.
Partnerships have widely varying results and can present partners with special challenges. Levels of give-and-take, areas of responsibility, lines of authority, and overarching goals of the partnership must all be negotiated. While partnerships stand to amplify mutual interests and success, some are considered ethically problematic, or at least debatable.
Depending on the partnership structure there may be tax disadvantages of being a partnership as the partners are taxed on all the profit earned by the business whether it is reinvested in the business or distributed to the partners whereas profits in a company are taxed at a much lower rate of corporation tax in a company compared with the current higher rate of income tax paid by partners. The additional tax only paid when the profits are distributed by way of a dividend
If two or more people wish to go into business together, but without going down the limited company route, a partnership offers a simple way to get started, similar in many ways to going the sole trader route for an individual.
A partnership has no legal status, as a Limited Company would, it is merely a vehicle linking two or more self-employed people in a simple business structure.
Essentially, each of the partner’s business income is counted alongside their existing personal income, so the accounting side of your business will be very straightforward. As the name suggests, partners are personally liable for any debts incurred in the running of your business which wouldn’t be the case under the Limited Company route.