The partners in a business partnership are usually self-employed individuals. However, a limited company can also be a partner.
Your liability as a partner
Partners share the responsibility for running the business. They share the fruits of their work, as well as any losses.
It is important to note that the partners within a partnership are personally liable for any debts incurred in the running of the business.
This means if something goes wrong and the partnership cannot pay its debts, the individual partners are individually legally responsible for any losses.
Partners and partnerships do not have the benefit of limited liability – this only applies to limited companies.
Before you start – legal considerations
If any of the partners leaves the business (e.g., die, resign, or go bankrupt), the partnership must be dissolved instantly since it has no legal status.
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Although most people enter partnerships with the best of intentions, problems can occur later down the line.
This can happen if one partner pursues a different course for the business, or wants to leave the partnership.
If you don’t have a deed of partnership, the Partnership Act of 1890 could end up being used if there’s a problem.
However, this won’t necessarily protect you, so it’s vital to make sure you’re covered before you start your business.
Choose a name for your partnership
When choosing a name for your partnership, you should read up on several guidelines (and legal considerations).
Don’t choose a name that is ‘offensive’, or contains any ‘sensitive words’. Examples include terms such as ‘Council’, ‘Chartered’, ‘Authority’, or other words that imply the business has a special status when it does not.
Avoid using trademarked terms in your business name, such as ‘Microsoft computer services’.
As sole traders and partnerships are not incorporated, you may not use the terms ‘ltd’, ‘limited’, ‘plc’, etc.
You must include the partnership’s name and its partners on any official paperwork, such as invoices.
There is no central database of partnerships and sole traderships in the UK, so choosing a unique business name isn’t always possible. There is no legal requirement to have a unique business name, as long as you follow the rules listed above.
Search the web for your proposed business name – particularly in your industry sector and local area.
When you form a partnership, one of the partners is designated as the ‘nominated partner’. This partner is responsible for registering the partnership with HMRC and submitting its annual tax return.
You can register with HMRC online here or – if you can’t use the online service – submit the paper form SA400, which you can access here.
You need to apply for a Government Gateway ID to complete this process.
The partnership should receive a Unique Taxpayer Reference (UTR) via the post within a few weeks (depending on the post!)
When you register the new business, have the following information to hand:
The name of the partnership
The name of the nominated partner
Details of each member of the partnership
The nature of the business
The partnership’s business address
Next, we look at how partnerships are taxed in more detail.
Partnerships – Tax matters
Partnerships—like sole traders—submit annual tax returns. However, the partnership doesn’t pay any tax or National Insurance on the profits made by the business.
Instead, the individual partners pay tax and NICs on their share of the partnership’s profits. This is the amount of money left after you deduct any expenses from your turnover.
As a result, the individual members of a partnership must also register and complete individual self-assessment tax returns.
Both the partnership and its members must register for self-assessment by 5 October in the second tax year after the business goes live.
Both the partnership tax return and the individual’s tax returns must be submitted to HMRC by 31st January each year. Any income tax and NICs owed by the individual members must also be paid by the same date.
Income tax and National Insurance
The partnership members pay income tax on their share of the partnership’s profits.
They also pay Class 2 and Class 4 National Insurance Contributions on profits.
For the 2024/5 tax year, income tax rates are as follows:
Most individuals pay no tax on the first £12,570 of income – the personal allowance.
After this, you pay the following rates on your total income for the tax year. This includes any income from the partnership plus any other untaxed income.
20% on income between £12,571 and £50,270 (basic rate).
40% on income between £50,271 and £150,000 (higher rate).
45% on income over £125,140 (additional rate).
For the 2024/5 tax year, the NIC rates are as follows:
Class 2 – £3.45 per week if your share of the profits is over £12,570. These are now voluntary contributions.
Class 4 – 6% on your share of the profits between £12,570 and £50,270. 2% on profits above £50,270
Accountants, accounting software, licenses, banking and insurance
Alongside the formal side of setting up a partnership, there are other things to attend to.
Hire an accountant (optional)
We recommend you talk to an accountant before you set up the business. They can advise you on how best to set up the partnership, as well as explain any tax implications for each partner.
If you hire an accountant a the start, they can guide you through the registration process with HMRC – and avoid any potential problems or errors.
Get accounting software (recommended)
These days, most business owners use online accounting software. One of the best products on the market is FreeAgent.
We use it every day at Bytestart. It makes dealing with your accounts, invoices, expenses and tax returns a breeze.
Other popular brands include Xero and Clearbooks.
Set up a bank account for the partnership (recommended)
Although there is no legal requirement to do so, it makes sense to set up a business bank account for the partnership.
This means that all business transactions go through a separate business account and are not mixed up with the partners’ transactions.
Make sure your business is adequately insured (recommended)
Some types of insurance are mandatory – such as employers’ liability (in most cases). Others might be required if you carry on certain types of trade, or if they’re a requirement of any contracts you sign.
Do you need any specific licences to run your business? (mandatory in some cases)
There are very few businesses which aren’t affected by red tape – rules and regulations – of some type. Make sure you know which ones apply to you and your new business.
Use this search facility from the Department of Business and Trade to see if you need to apply for one of over 400 specific licences to carry on your trade.
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