General Partnerships Advantages and Disadvantages

When it comes to launching a new venture, selecting the appropriate business structure is a critical decision. Business partnerships might not be the foremost choice for many, but they can be quite practical for some individuals. In the UK, business partnerships account for the smallest percentage of small to medium-sized businesses, with sole traders and limited companies being more prevalent. This article focuses on the advantages and disadvantages of general business partnerships and provides guidance on establishing one.

Understanding General Business Partnerships

A business partnership is a structure where two or more individuals share responsibility for a single enterprise. It’s essential to differentiate between the three types of partnerships: general partnerships, limited partnerships, and limited liability partnerships. This article will concentrate on general partnerships.

A general partnership is akin to operating as a sole trader in that both only require self-assessment tax returns to fulfil tax obligations. A general partnership is not considered a separate legal entity, meaning all partners are personally liable for the business. Partnerships are commonly found among individuals with close relationships, such as family members or friends. However, they are often the least popular option for business owners due to potential complications that may arise from deteriorating personal relationships or changes in partnership composition.

Establishing a business partnership allows for the sharing of costs, responsibilities, and risks among partners. Profits are also shared among partners unless otherwise agreed upon in advance.

Pros and Cons of General Business Partnerships

Starting a business can be both exhilarating and daunting. Having others equally invested and involved in the business can provide reassurance and invaluable support. However, like all other business structures, partnerships have their advantages and drawbacks.

Advantages of Setting up a Partnership:

1. Easier registration with HMRC than registering a new company with Companies House, without any fees.
2. Less paperwork compared to limited companies, such as company tax returns, statutory accounts, and confirmation statements.
3. Shared responsibility for managing the business.
4. Easy setup, with a partnership agreement that can be verbal or written (though a written agreement is recommended).

Disadvantages of Setting up a Partnership:

1. Partners are personally responsible for the business, and creditors can claim personal assets to settle outstanding debts.
2. If a partner leaves the partnership, the remaining partners may become responsible for the entire partnership debt, even if it was incurred by the departing partner.
3. Partnerships are not required to be registered at Companies House, which may be seen as a risk due to a lack of transparency.
4. Winding up a partnership can be more complicated and costly than ceasing trade as a sole trader, often involving court and legal fees.

Tax and Legal Responsibilities for General Partnerships

While there are fewer tax and legal obligations for partnerships compared to limited companies, all partnerships must register with HMRC. Ongoing responsibilities include submitting annual partnership self-assessment tax returns, individual partner self-assessment tax returns, drawing up a partnership agreement (optional but recommended), and maintaining separate accounting records for the business and personal accounts.

Setting up a General Business Partnership

Establishing a business partnership is relatively simple and can be done independently. However, it is crucial to consider potential future events, such as the dissolution of the partnership, which may lead to complexities and challenges.

Choose your business partner(s), considering that a partner can also be a limited company. The maximum number of partners in a general partnership is 20, with some exceptions in specific sectors.

1. Select a name for your partnership, either using personal name or a trading name. Keep in mind that partnership trading names cannot be registered at Companies House for protection. To protect the name, it must be registered as a trademark. When selecting a trading name, adhere to certain rules and regulations to avoid conflicts.
2. Draft a partnership agreement. Though not mandatory, it is strongly recommended. The partnership agreement should outline the terms and conditions of the partnership’s operation, including each partner’s capital contributions, profit and loss sharing, provisions for retirement or death of a partner, dispute resolution, and dissolution procedures.
3. Designate a nominated partner who will be responsible for registering the partnership with HMRC and completing partnership tax returns. This nominated partner is the key contact for HMRC, but all partners are liable for any penalties resulting from late tax return submissions.
4. Register the partnership with HMRC, ensuring the nominated partner has a Government Gateway user ID and password. The partnership must be registered by the 5th of October in the business’s second tax year to avoid penalties.
5. Partners must register for self-assessment to declare their income from the partnership. The deadline for registration is the same as the partnership registration deadline.
6. Complete annual tax returns for the partnership and individual partners. Each partner must submit their personal tax return in addition to the partnership tax return, with income tax and national insurance contributions based on their share of partnership earnings.
7. Register for VAT if the partnership’s annual VAT-able turnover reaches the £85,000 threshold or if the partnership voluntarily opts to register before reaching this threshold. Once registered, the partnership must submit regular VAT returns to HMRC.

If you are considering the best structure for a new business with one or more partners and are deciding between a partnership and a limited company, reach out to our tax advisors for a consultation to determine the most suitable structure for your specific needs.