A partnership is a relationship between two or more individuals or businesses for the mutual benefit of running a business and sharing profits. For some, this shared responsibility is key, but understanding accountability and obligations between the partners is equally important. If you’re considering entering or starting up a business partnership, this article will help you understand the differences between the structures available, with a view to ascertaining the right option for your business.
The different types of partnerships
There are different types of partnerships, with differing legalities, liabilities and set-up rules. The three most common types are set out below:
Ordinary Partnerships (sometimes known as General Partnerships) explained:
This is a business jointly owned by two or more partners who share the business’ profits. In the same way as working as a Sole Trader, there is no separate legal entity for the business, and so any debts lie with the individuals, the same goes for tax liabilities with each partner responsible for their own NI contributions and income tax via self-assessment.
In addition to the personal tax affairs of the individuals, the partnership is also responsible for an annual partnership tax return. A Nominated Partner, assigned by the partners will be responsible for managing this, along with registering the partnership with HMRC.
Limited Partnerships explained:
As with an Ordinary partnership, the partners of a Limited Partnership are responsible for their own individual NI and income tax, and again, this one is not its own separate legal entity. One difference between a Limited Partnership to an Ordinary Partnership is the liability between the partners. The partnership would be made up of at least one Limited Partner and one General Partner – the liability of the limited partner would depend on their financial investment to the business, whereas a General Partner’s liability would be the same as if they were in an ordinary partnership in the scenario above. Unlike the aforementioned, a Limited Partnership needs to be registered with Companies House.
Limited Liability Partnerships (LLP’s) explained:
An LLP is also required to be registered with Companies House, but it differs to the Limited Partnership (and the Ordinary) as it does have a separate legal entity to its partners, and therefore the partners’ individual assets are separate to the business’s liabilities, debts and financial risk. In this scenario, each partner’s liabilities are limited (hence the name) to their own individual investment into the business, and so each are also not responsible for any debts or liabilities held by their fellow partners. Just as with the above two partnership types, each partner is again responsible for their own NI contributions and income tax.
This structure requires a formal Partnership Agreement outlining the responsibilities and rights of each member. While this document isn’t a legal requirement in the setting up of the partnership, it is strongly recommended to avoid any issues further down the line between partners.
We do however recommend that all partnerships have a partnership agreement in place from the start, which can be easily amended as and when partners join/leave or when circumstances change which could result in a change of responsibility or profit share.
When forming an LLP, there must be two or more designated partners that are responsible for registering it with Companies House, and for the annual reporting and annual accounts.
What are the Pros and Cons of each Partnership type?
Taking the above into account, let’s consider that an Ordinary Partnership and an LLP are on either end of a scale, with Limited Partnership sitting in the middle of the two. Let’s look at the advantages and disadvantages of each option:
Advantages of Ordinary Partnerships:
- Easy setup – less formality than the other two options.
- Less administration – no need for filings with Companies House.
- Privacy – not being on the Companies House public register means your accounts aren’t visible to view by the public.
Disadvantages of Ordinary Partnerships:
- Not a separate legal entity – debts and liabilities incurred by the business are held by the partners personally.
- Legalities – there is no legal requirement for a Partnership Agreement (however it is recommended that there is always one in place).
Advantages of Limited Partnerships:
- Limited Partner – the partner who is nominated as the Limited Partner only has limited liability.
- General Partner – is entitled to make most of the decisions, holding more power.
Disadvantages of Limited Partnerships:
- Limited Liability partner – is not able to manage the business.
- General Partner – has personal liability for the business’ financial risk.
Advantages of LLP’s:
- The business being incorporated means it is a separate legal entity – so the liabilities of the company are exactly that – of the company, and not the individual partners.
- All partners have equal management rights.
Disadvantages of LLP’s:
- More administration in terms of filings with Companies House and HMRC.
- Details available on the public record – the accounts you submit, partner names and registered office address,
It is recommended that you consult a legal expert for details about any legal matters surrounding your partnership, however if you’d like advice on making the most out of your tax efficiency when considering which business structure would work for you, our team of dedicated accountants here at Integro Accounting are happy to help. Take a look at the services we offer, covering all the tax needs of yourself and your business partnership.