Business Structure | Partnership

Becoming a partnership

Have you read our article about becoming a sole trader?

Well, a partnership is just like a sole trader – but more than one person is involved in the control of the business.

The key features of a partnership

  • partners can split the profits in whatever way they choose (as long as they have a partnership agreement – see below)
  • partners have unlimited liability for company debts
  • all the names of the partners must be displayed at your premises and on all paperwork
  • if a partner leaves or dies, the partnership must be dissolved – this can be avoided but you will need to take legal advice

Tax duties of a partnership

Just like a sole trader, each partner will need to register as self-employed and fill in a Self Assessment tax return each year. You’ll also need to fill in partnership supplementary pages (SA104). However, in addition, the partnership itself must submit its own tax return (SA800) showing each partner’s share of the profits or losses. Income tax and National Insurance is paid on the profits generated. Partners (just like sole traders and limited companies) can also be liable for Capital Gains Tax on the sale or disposal of assets.

If the partnership has a turnover of more than £85,000 over twelve months (for 2019/20), you will need to register for VAT – find out more here.

The Limited Liability Partnership

In 2001, a new type of partnership was introduced by the Limited Liability Partnership Act 2000. Like companies, LLPs are separate legal persons and are subject to similar registration and accounting requirements. As the name suggests, an LLP also has limited liability like a company and the partners are not individually liable for the LLP’s debts. Consequently, LLP status is attractive to professional firms that might face the risk of large liability claims.

For taxation purposes, however, an LLP is treated like a traditional partnership so the partners are still self-employed and pay income tax and NICs on their share of the profits. LLPs do not pay corporation tax.

Should I set up my private practice as a partnership?

If you and a colleague or colleagues wish to set up a private practice, but don’t want to incorporate as a limited company or a limited liability partnership, a partnership is the ideal choice. However, you must remember that all partners are liable for the debts of a partnership. You MUST trust your partners and have total confidence in them. 

The partnership agreement (a deed of partnership)

It is strongly advised that you have a partnership agreement. This should state who the partners are and what their partnership profit shares are. 

If you do not have a partnership agreement then HMRC will insist that profits (or losses) are divided equally between all partners.

You could simply state in the agreement that profits will be allocated on a basis to be agreed year by year. This is helpful if you would like to build flexibility into the profit distribution. If your partner is also your life partner, it can build in some good cash flow planning opportunities.