In this article, we look at another type of business structure – the partnership – which enables two or more self employed people to set up in business together.
The most popular type of business structure in the UK is the sole tradership. Being a member of a partnership is very similar from a tax and legal point of view as that of a sole trader.
How to set up a partnership
It is fairly simple to form a partnership. Once several people have decided to go into business together, they can become a ‘partnership’, although there is no formal legal registration process involved.
You will need to register the partnership and all partners in the business with HMRC for self assessment, i.e. register as self employed.
You can do this online via Form SA400 here (to register the partnership), and Forms SA401 or 402 to register the members of the partnership for self assessment.
Unlike the limited company structure, you do not have to register the partnership at Companies House, nor deal with many of the administrative duties associated with incorporation.
On the other hand, the liability of partnership members is unlimited if things go wrong. If the partnership owes money, this liability also falls on the members of the partnership.
Types of partner
There are 3 main types of partner – a general partner who is involved in the day-to-day running of the business, a sleeping partner who has invested in, but does not ‘run’ the business, or a limited company can become a partner. In the case of a limited company partner, they will have different reporting and tax duties to fulfil, which do not apply to other types of partner.
You may also have a ‘salaried’ partner, who receives a regular salary from the partnership, but does not have a stake in the business itself.
What is a deed of partnership?
We highly recommend that you draft a deed of partnership, which outlines the intentions of the parties – how the business is going to be run, how much each partner has invested, what roles the partners will perform, and what happens if something goes wrong or a partner wants to leave.
If you don’t create your own deed or partnership, then the Partnership Act 1890 is used to settle any issues which may arise. This may well not be in the best interests of the members.
You should seek legal advice before setting up a partnership, including asking a solicitor to draft a deed or partnership.
How are partnerships taxed?
Both the partnership itself, and the partners, are taxed via the annual self assessment process. You must register both the partnership, and its members for self assessment using the online for on the HMRC site here.
If the partnership turns over £73,000 or more in any 12 month period, you must also register for VAT.
As a member of a partnership, you will also be liable for Class 2 and Class 4 National Insurance Contributions on your income (NICs).
You must pay Class 2 NICs from the moment you register as self employed (currently £2.50 per week in the 2011/12 tax year – unless you earn less than £5,315). You can apply to pay Class 2 NICs by direct debit here.
You will also have to pay Class 4 NICs on any income you make in the tax year – this will be deducted via the annual self assessment process.
Some businesses decide to set up as Limited Liability Partnerships (LLPs), which operate in a similar way to partnerships, but the liability of the partners is limited. We will explore the pros and cons of the LLP structure in a forthcoming article on Company Bug.
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