Whilst forming a partnership can be an extremely flexible way for two or more people to own and run a business together, it is important to appreciate that under this type of trading vehicle, the partners themselves do not have individual protection. If one of the partners resigns, dies, or goes bankrupt, the partnership has to be dissolved, even though the business itself may not need to cease. Although there is no legal requirement to do so, it is highly recommended that, on forming a partnership, a formal partnership deed is drawn up. Many partnerships ask a solicitor to help with this, but it is possible for the partners to drawn one up themselves.
Broadly, the partnership agreement sets out what each partner is responsible for and what he or she can expect from the business. Each partner of the firm will be self-employed, taking a share of the profit and paying income tax and NICs personally on that share. However, each partner will also be personally responsible for any (and potentially all) debts that the partnership incurs.
It may be worthwhile considering forming a partnership with a sleeping partner, who usually receives a smaller annual share of the partnership’s profits. In simple terms, a sleeping partner normally contributes money to the business but doesn’t get actively involved with running it.
The partnership needs to appoint one of its officers (the nominated officer) to fill in the partnership tax return each year and send it to HMRC. This return includes a Partnership Statement, which shows how profits or losses have been divided amongst the partners. The nominated partner also has to give each partner a copy of the Partnership Statement to help them complete their own personal tax return correctly.
Partners are individually responsible for submitting their own self-assessment tax returns. However, the partnership must register with HMRC by 5 October in the business’s second tax year, or a penalty may be incurred.
With regard to VAT, where a sole trader takes in one or more partners there is a change in business entity for VAT purposes. If the sole trader is VAT registered, the change must be notified to HMRC within 30 days and his/her VAT registration will be cancelled. Alternatively, an application may be made (on form VAT 68) for the VAT registration to be transferred to the partnership. The partnership itself must register if the VAT taxable turnover is more than the VAT registration threshold (currently £85,000).
Limited liability partnerships
In some circumstances it may be worth considering the formation of a limited liability partnership (LLP). This type of trading vehicle is similar to an ordinary partnership in that a number of people or limited companies join together and share the costs, risks, and responsibilities of the business. They also take a share of the profits, and pay income tax and NICs on their share of the partnership profits. However, under an LLP, debt will be limited to the amount of money each partner invested in the business and to any personal guarantees given to raise business finance. This, in turn, affords members some protection if the business runs into difficulties because their liability will be restricted in general terms to the level of their investment.