Business Structures for Start-ups: Partnership
The business structure that Founders are choosing at the start point will create different obligations regarding accounting and tax as well as determine how long it takes to get your business trading amongst other things. Therefore, they need to learn more about the legal structure and get familiar with the set of rules and requirements before making this important decision.
In this blog, we will briefly talk about a Partnership, one of three business structures, the legal requirements, and the processes needed to register as one.
How it works
A Partnership is a group of people that share responsibility over a business. It could range anywhere between 2 to 20 partners, and often those partners are their spouse, family members or a friend. To become a Partnership, you just have to register with HM Revenue & Customs. The tax has to be paid with each partner having to register as self-employed and submit a Self-Assessment tax return every year.
There are several types of partnerships, known as ordinary, limited partnerships and limited liability partnerships. Whilst there are many similarities, the key distinctions are:
Ordinary Partnership has no legal existence distinct from the partners themselves. If one of the partner’s leaves, dies or goes bankrupt, the partnership must be dissolved. However, the business can still continue. Ordinary Partnerships have to be registered with HMRC for tax purposes and the nominated partner can do that by registering the partnership for Self-Assessment.
Limited Partnership is made up of a mixture of ordinary partners and limited partners. These types of partnerships must register with Companies House but usually don’t need to make an annual return or file accounts. Once Companies House receives the registration, they inform HMRC to set up the partnership’s tax records.
Limited liability partnerships (LLPs) must have at least two designated members. LLPs are taxed as partnerships but have the benefits of being a corporate entity, and members have limited liability. LLPs must register with Companies House, send Companies House an annual return, and file accounts with Companies House. Just like with Limited Partners, there is no need to get in touch with HMRC as Companies House will inform about the new LLP being set up.
Advantages & Disadvantages
The advantages of a Partnership (overall, but some differences are present considering the type of agreement you’re in) are very similar to a Sole Trader which we discussed previously. It involves a limited bureaucracy, an easy-to-follow taxation system, and a very straightforward process to set up one. In addition, all of the partners fund the business which means that raising capital will be easier than for Sole Traders due to higher credibility. Multiple partners will also share responsibility.
On the other hand, just like Sole Traders, partners have unlimited liability and their personal income will be affected if their business fails. A partnership often brings a higher risk of disagreements, and the bigger the entity is, the higher that risk.
How to register Partnerships
To set up a Partnership, you will need to select the name of your business (certain requirements apply here for Limited Partnerships and LLPs), nominate a partner and register with HMRC. In addition, make sure your business, you and your partner are registered with HMRC separately for tax assessment. If you expect your business sales to be more than £85,000 a year, you also must register your business for VAT.
For Limited Partnership, you will also need to have a registered address (also known as your principal place of business) and appoint general and limited partners. To set up LLP, you must have at least 2 designated members and have an LLP agreement that says how the company will be run.
To find out more about different partnerships and how to set them up please visit the official government website.
Finding the right business structure for your start-up is crucial as it will have implications on your business’s taxation, finance, and overall business success. If you need advice on what business structure is right for you, feel free to get in touch with our team of experts.