What is a business partnership?

A business partnership is a type of business structure in which two or more individuals agree to operate a business together and share its profits, losses and responsibilities. Exactly how this works depends on the type of business partnership you agree to.

Key takeaways

• A business partnership is an arrangement between two or more people to run a business together

• In a general partnership, all partners are liable for business debts

• In a limited liability partnership, partners have limited liability for business debts

• A limited partnership has general partners with unlimited liability and limited partners with limited liability

• Your partnership agreement should define each partner’s role and specify how profits and losses will be shared

How does a business partnership work?

In a business partnership, you and your partner(s) agree to start a new business or run an existing one together. There is no legal limit to the number of partners you can have, but management can become more challenging the more there are.

All partners should agree to and sign a partnership agreement that outlines how to operate the business and how to split profits and liabilities, including who has responsibility for managing the accounts.

Each partner must pay the appropriate tax on their share of the business profits.

Types of business partnerships in the UK

The main types of business partnerships in the UK are as follows:

General partnerships

With a general partnership, there is no legal distinction between the business and the owners. Each partner is personally liable for any losses the business makes, so if one partner can’t pay their share of the debt, the other may have to pay it instead.

Each partner must register with HMRC separately, but as part of the same partnership. This means you must each submit a separate tax return and pay tax on your share of the business profits. You might share profits equally or agree to a set percentage.

A general partnership is usually the easiest type to set up. However, if one partner leaves, the partnership usually dissolves.

Limited partnerships

A limited partnership is a more formal arrangement and has at least one general partner and at least one limited partner.

General partners manage the business and have unlimited liability, while limited partners typically can’t participate in managing the business and have limited liability for business debts – usually up to the amount invested.

Limited partners only receive their share of the profits once the general partner has received theirs.

Limited liability partnerships

A limited liability partnership (LLP) is a separate legal entity from its members. This means all partners have limited liability for business debts, protecting their personal assets.

You need to register your LLP with both Companies House and HMRC. After that, each member must file a personal self-assessment tax return, pay income tax on their share of the profits, and make National Insurance contributions.

The LLP itself must prepare and submit annual accounts, so you may want to engage an accountant and, if required, appoint a company secretary.

Advantages and disadvantages of running a partnership

When considering whether to set up a business partnership, it’s important to weigh up the pros and cons.

Advantages

• Combined skills and resources: Partners can pool capital, expertise and contacts, which can help to build a stronger business

• Shared responsibilities: Each partner shares workloads, decision making and financial risk, so no one person bears the entire burden

• Flexibility: You can tailor the partnership agreement to suit your exact needs – profit splits, management roles, exit terms and so on

Disadvantages

• Potential for disputes: Differences over strategy, money, workloads or exits can strain relationships and disrupt the business if not carefully managed

• Profit sharing: You must divide the business profits among partners, even if one contributes more time or capital than the others (unless the agreement says otherwise)

• Liability issues: With a general partnership, each partner has personal liability for business debts

How to register a partnership business

To set up a business partnership, you need to choose a business name and register the business with HMRC.

If you’re establishing a general partnership, you must choose a nominated partner to manage the partnership’s tax returns and keep business records.

If you’re setting up as a limited partnership or a limited liability partnership, you must have a registered address and register with Companies House. Limited partnerships also need to appoint general and limited partners.

Once registered, it’s worth setting up a partnership bank account.

Is a partnership the right choice for you?

If you’re keen to set up a business with at least one other person, a business partnership is worth exploring. The next step is to consider what type of partnership you want.

If you’re looking for a quick and easy setup, a general partnership might be most suitable. But if you’d prefer to have a more formal arrangement with limited liability for business debts, an LLP might be better.

Before choosing your business structure, it’s worth seeking financial advice. A financial advisor can help you evaluate the financial implications of each structure and provide tailored recommendations to help you make the right choice.

Managing a successful partnership

Communication is key when it comes to successfully running a partnership, as are mutual respect and trust. It’s important to have open and honest discussions with your partners to keep your relationship working well.

Also make sure you have a partnership agreement in place that clearly defines the following:

• Roles and responsibilities: Assign roles based on each partner’s skills, expertise and interests

• Profit split: Ensure this reflects each partner’s contributions, whether in time or capital

• Loss sharing: Also specify how you will share business losses

• Decision making: Establish how you will make business decisions, including voting rights of each partner

• Exit strategy: Outline what happens if one partner wishes to leave or dies