Setting up a partnership – what do I need to know?

Setting up a partnership – what do I need to know?

This article is the third in the series about the main types of business structure, alongside self-employment and limited companies.
Setting up a partnership is perfect for those who want to run a business but don’t have the full range of skills required or simply need help sharing the workload, or someone to be alongside them as they navigate the challenges of running a new business.
However, there are some disadvantages to the structure so read on to find out if this is the way forward for your business idea.

The ideal partner

For those who want to go into business but want to do it with one or more other people, there are some important considerations.

Ideally your future partners should have complementary skills and share your vision for the business. You will need to carefully assess their level of commitment and whether or not they have time constraints that might prevent them from contributing as much as you need them to. And running a new business is hard work and requires a lot of commitment, think carefully about your prospective partners’ work ethic: have they got what it takes?

Furthermore, partners are collectively liable for debts so if you have doubts about your potential partner’s financial acumen or probity it would be best to pick someone else.

The process of drawing up the partnership agreement, which is discussed below, should help winnow out unsuitable people. Bear in mind a partnership is like a marriage: it’s often much easier to get into than get out of so do your due diligence on your partner or risk repenting at leisure.

What type of partnership is right for me?

There are three types of partnership structure to choose between: ordinary partnership, limited liability partnership and limited partnership, and different types of partners:

• equity partners – they contribute capital and share profits and losses;
• salaried partners – they take a salary but may not put in capital;
• sleeping partners – investors who do not have a role in running the partnership’s business;
• limited partners – their liability is limited to the amount of the capital that they have invested;
• limited liability partners – they are a separate legal entity from the partnership.

Ordinary partnership

This is the most straightforward set-up and resembles being a sole trader working with other sole traders. The partnership is unincorporated and does not have to be registered at Companies House, and the partners pay income tax on profits not corporation tax. However, unlike a sole trader business the partnership should have a name.

You will share the profits (and losses) and are both fully liable under the principle of joint and several liability for the debts of the business, a disadvantage of this structure.

It is important to draw up a deed of partnership otherwise the law will regard your arrangement as a partnership at will, which means a partner can quit without notice and is entitled to withdraw his or her capital.

One of the partners needs to be the nominated partner and will be responsible for registering with HMRC and taking care of the partnership’s tax affairs.

Charitable or not-for-profit concerns may not form partnerships as it is a legal requirement that partnerships are created with a view to making a profit.

Limited partnership

A limited partnership must contain one or more general partners (GPs) and one or more limited partners (LPs). The GPs are liable for all the debts and obligations of the firm whereas the LPs are not normally liable for any loss greater than the value of their contribution. A GP can be a legal entity, such as a limited company, as well as an individual.

The limited partnership is not a separate legal entity from the partners and contracts entered into by the partnership are done so in the name of general partners rather than that of the partnership. Contracts entered into by the GPs are usually binding on the LPs.

Given the different status of GPs and LPs tensions can arise in the running of the business. While LPs exercise some power over how the business is run they are outranked by GPs.

As the limited partnership is not a legal entity, partners pay income tax rather than corporation tax and must do self assessment tax returns in the same way a sole trader does.

Limited liability partnership

A limited liability partnership is the choice of most professional firms. Partners pay income tax and are personally liable for business debts if general partners but not if they are limited partners, who are liable to the extent of the capital that they have contributed. Like a limited partnership a partner can be a limited company as well as an individual.

A limited liability partnership (LLP) has to register with Companies House, a process that requires it to have a name, a registered address, a minimum of two designated members and an LLP agreement. The designated members are responsible for the company accounts.

Like a limited company, it is a legal entity and contracts are entered into by the LLP rather than by the partners. It has to register for VAT if turnover exceeds £90,000.

The structure and operation of an LLP is flexible, which is partly why the structure is appealing to professional services firms. Such a firm can have different classes of partners as set out above, who have different amounts of responsibility and equity in the firm. Furthermore, LLP partners can enter and leave the partnership without capital changing hands and without tax implications.

Those thinking of setting up an LLP and who are seeking investment should be aware that they are at a considerable disadvantage relative to a limited company. Potential backers are unable to buy shares in an LLP so in order to make an investment would have to become partners themselves. The inability to buy and sell shares in an LLP means it is challenging to gain a return from a financial stake in one.

Partnership agreement

This is an essential first step in forming a partnership although it is not a legal requirement and it is wise to seek legal advice when drawing one up. The agreement should contain the rules for operating the partnership. This will typically include:

• the decision-making process;
• how a partner may leave the partnership;
• respective responsibilities;
• capital contributions;
• how profits will be shared;
• the share each partner has;
• how the partners work together;
• dealing with changes in the partnership; and
• how to resolve disputes.

If there is no partnership agreement some aspects of the partnership will be governed by the default legal provisions. However, the partnership agreement can play a vital role in avoiding and settling disputes among the partners.

It is a very good idea to get the partnership agreement in place as soon as possible. Without it a partner is free to do as he or she pleases – that includes not turning up to work, arguing over the profits distribution or just walking away from the partnership, thus setting in motion the dissolution process.

Choosing a name

Whichever sort of partnership you choose, its name will be governed by certain rules. You are not allowed to use:

• trademarked terms;
• misleading terms such as ltd, plc;
• offensive words;
• words that imply the partnership has a status that it does not, such as that it is part of government or has some official standing.

The partnership’s name and the names of its partners must appear on official paperwork such as invoices. As the partnership is unincorporated there is no requirement to pick a name that is unique.

New partners

All types of partnership can admit new partners. In the case of a general or ordinary partnership the partnership will revert to being a partnership at will unless the partnership agreement sets out the rules for admitting new partners and that existing partners agree to be bound by those rules.

For limited partnerships, the default position is that GPs do not need the consent of LPs to admit new GPs and LPs so provisions for admitting new partners need to be in the partnership agreement.

In an LLP all partners need to consent to the admission of new partners. Again most LLPs’ partnership agreements will have rules relating to the admission of new partners.

Leaving a partnership

Partners in any sort of partnership may resign; however, how they do this and the consequences of resignation are governed by the partnership agreement and by the relevant law.

Is a partnership right for me?

Going into business with someone else involves risks and challenges that are not faced by sole traders or limited companies. And there are also the tax and legal implications of choosing a partnership structure rather than becoming a sole trader or going down the limited company route. Given this, it can be very helpful to seek professional advice before committing yourself.

So for those who think the partnership route is the one for them and would like more bespoke advice about their business plans or to take advantage of our accountancy services, please contact Finsbury Robinson.

We are a full-service tax, accountancy and business advisory firm, and our friendly and highly experienced team are available on 020 8858 4303 or via email at

info@finsburyrobinson.co.uk

Angus Walker 01/11/2025