A Guide to Setting Up a Partnership
A business partnership is a great way to get your new business up and running quickly and efficiently. You can get your business off the ground faster and with less stress by sharing the workload. But before you embark on this exciting venture, there are a few things you need to consider. First, you need to choose the right partner. Someone who shares your vision and values and who you can trust to work hard and play fair.
Once you’ve found the perfect partner, the next step is to draw up a partnership agreement. This document will outline the roles and responsibilities of each partner, as well as how profits are distributed.
Finally, you need to register your partnership with HMRC. It will ensure that your business is taxed correctly and that you comply with all the relevant regulations. With these simple steps, you can establish a partnership to help your business thrive.
This article looks at setting up a business partnership and if it is the best business structure to use. If unsure, it is always best to seek professional business advice.
What is a Partnership?
A business partnership is a legal status arrangement between two or more individuals who agree to operate a business together. The partners share the profits and losses, and each has an equal say in how the business is run.
A partnership does not have its own legal entity; the partners are self-employed in their own rights. A partnership in the UK is governed by the Partnership Act of 1890.
Forming a partnership can provide certain advantages, such as shared risk and increased capital. However, partnerships can also be complex and challenging, so it is essential to select the right business partner and have a clear understanding of the responsibilities of each person involved.
Partnership Definition from the Partnership Act 1890
A partnership is a relationship between persons carrying on a business in common with a view of profit. Therefore a partnership is between two or more people and has its own legal identity.
Why Set up a Partnership?
You’ve got a great business idea, but you don’t have the time or money to go it alone. A business partnership could be the perfect solution. By teaming up with another person, you can share the workload and the costs and get your business up and running faster.
You are signing a legally binding agreement with another person or people by setting up a partnership. It means that you are both responsible for the success or failure of the business. It is, therefore, essential to consider if this is the best option for your business venture.
When do I need to Register a partnership?
Business partnerships in the UK must inform HMRC of their partnership by 5th October in the second year of business. This can be done online or by using form SA400.
To register a partnership with HMRC, you need the partnership’s name and contact details, the partners’ names and addresses. The registration process is simple, and it is essential to ensure that all businesses comply with the law.
Each partner must register as self-employed with HMRC and pay their personal income tax and national insurance contributions.
How to Set up a New Partnership in the UK?
Starting a business partnership in the UK is relatively straightforward. It is not a legal requirement to draw up a business partnership agreement, but it is recommended as it details how it is run.
Choose a Unique Business Name
The first step is to choose a unique business name. Once you have settled on a name, you must register it with HMRC and use it on all official paperwork. If you want to stop other people from using the name, you will need to register the name as a trade mark.
There are rules in choosing a name, such as it cannot be the same as another registered trade mark and must not contain any sensitive or offensive words. The name can’t include incorporated words such as Ltd, limited or plc.
Nominated Partner
You must choose a nominated partner responsible for tax returns and keeping records.
Once these details are agreed the nominated partner is ready to register your partnership with HMRC.
What do I Need to Include in a Business Partnership Agreement?
If a partnership agreement is not created, the partnership will be governed by the Partnership Act 1980. The act treats partners as equals. They take an equal share of the business profits and are equally responsible for any debts or losses.
Partnership agreement templates are available online, or speak to a solicitor to get one drawn up and for advice. I looked at one with the law depot with a free trial or £29 for five years. Below is an example of an agreement using made-up names.
The basic information required for a partnership agreement is as follows:
- Names
- Percentage of Ownership
- Division of Profit and Loss
- Drawings
- Length of Partnership
- Partner duties
- Decision Making
- Partner authority
- How to end the partnership
Partnership Bank Account
Although it is not a legal requirement to open a business bank account for a partnership, some banks will not allow business transactions to go through on a personal account.
It is best to open a business bank account for the partnership as it will help with credibility, sourcing business loans, organising the bookkeeping and keeping accurate records. If you are looking for a bank account, look at Tide.
Partnership Tax Returns
Partnership tax returns (SA800) are filed with HMRC and used to declare a partnership’s income and expenses. The nominated partner must complete the Partnership Tax Return. There is no income tax due on the partnership as the profit or loss is passed to the partners.
The tax year runs from 6th April to 5th April, and tax returns must be submitted by 31st January the following year to avoid a penalty and interest for late payments.
Each partner submits a self-assessment tax return, and they will pay income tax and national insurance contributions on it.
What are the other Options for a Business partnership?
It is essential that when setting up a new business, you choose the best business structure.
Below are the different business structures:
Sole Trader
A sole trader is a business structure where one individual owns and manages the entire business. It is relatively easy to set up and requires less paperwork than other types of businesses, such as partnerships or companies. You can decide what products or services to offer, how to run the business, and how to market your products or services.
You also take all the profits of the business, but if it gets into debt, you are liable for the debt. You will pay income tax on any profit.
Limited Company
A limited company is a type of business entity that has been incorporated under the Companies Act and registered at Companies House.
The shareholders of a limited company are not liable for the company’s debts, except to the extent of their investment in the company. A limited company must have at least one director and one shareholder. The shareholders elect the board of directors, which in turn appoints the officers of the company. The directors manage the company’s affairs and are responsible for its day-to-day operations. The shareholders are typically entitled to dividends if the company profit.
Limited Liability Partnership
A limited liability partnership (LLP) is a business entity that combines a corporation’s and a partnership’s features. An LLP is formed when two or more people agree to create a business and to have limited liability for the debts and losses of the business. A Limited Liability Partnership is registered with Companies House and must file annual returns in the same way limited companies do.
Do I Need to Register for VAT?
If your taxable turnover exceeds the current threshold of £90,000 from 2024, you must register for VAT (Value Added Tax). You may also want to register voluntarily even if your turnover is below this amount.
The process for registering is straightforward and can be done online. Once registered, you will need to charge VAT on most of the goods and services you provide. You will also need to submit regular returns to HMRC detailing how much VAT you have charged and how much you owe.
The Pros and Cons of a Business Partnership
Below is a list of the Pros of setting up a partnership.
- Partners share the workload and can divide up responsibilities according to their skills and strengths
- Partners can share the costs of setting up and running the business
- Partners have a shared interest in the success of the business
- Partnership agreements can help to avoid disputes between partners
- It’s easy to set up a business partnership
Cons of a partnership
- You might disagree with your partner over how it is run
- You personally liable for any debts of the business
- It’s not your own business
- If you sell business to business, they might prefer to work with limited companies
What is the Best Way to Complete Partnership Accounts?
There are several options for keeping accounting records. You are required to keep all records for at least six years.
Use Bookkeeping or Accounting Services
If you want to free up your time to concentrate on other business activities, it is worth investing in a bookkeeper or accountant.
One advantage of using a bookkeeper or accounting services is that they will know the tax rules and what expenses you can claim for the business. They might reduce your tax bill.
Partnership Accounting Software
The best option is to use small business online accounting software for partnerships for the following reasons:
- Easy to set up for a new business
- Both partners can view the accounts and have access
- Record income and expenses
- Double entry bookkeeping
- Invoice customers on the go and receive payments
- Can save time on paperwork
Excel Bookkeeping Templates
Another option is to use Excel bookkeeping templates; we have a selection available for free download, including cash book, petty cash, fixed assets, profit and loss and balance sheet.
Setting up a Partnership Conclusion
Business partnerships can be a great way to get your small business up and running faster. However, it is essential to choose the right partner and to have a clear understanding of the responsibilities of each person involved. You should also register your partnership with HMRC and ensure that you comply with all the relevant regulations. You can set up a thriving and successful business partnership with these simple steps.
