The age-old question for those thinking about starting a business. Do you run it by yourself, or with someone else? In reality, there’s no one-size-fits-all answer, with every business being a unique entity and every situation being different.
So what should you consider before deciding to launch into a business partnership with someone? It’s obviously a big step to take, so we’ll start with the basics.
What is a business partnership?
In simple terms, a general partnership is a type of legally recognised business structure which allows a group of people or organisations to work together while sharing all the responsibility.
Partners can be individuals, companies, other partnerships, or even some kind of combination.
One key distinction is that, unlike a Joint Venture agreement, a partnership is required to register as a legal entity.
When should I choose a business partnership?
The main difference between a partnership and, say, a limited company is the way liability works.
As the owner of a limited company, you’re considered a separate entity. This means your personal assets are protected if the business can’t pay its bills, but it also means any profit belongs to the business (and not you).
In a partnership, on the other hand, each partner is jointly liable for everything that happens, and so you share the risks, but also the profits.
The fact that the responsibility is shared in a partnership is one reason you might choose this over being a collective of sole traders with a casual agreement to work together.
It really comes down to risk vs. reward and what you’re willing to put on the line.
What taxes do partnerships pay?
Although partnerships do have to submit SA800 tax returns, they don’t actually pay tax on the profits they make.
One of the partners is nominated to register the partnership with HMRC, and also submit its tax returns, but each partner is still responsible for paying tax based on their share of the profits. Individuals will include their share when submitting their own personal tax returns.
If a partner happens to be a limited company, the directors of that company will include their share of the partnership’s profits as another source of income on the Company Tax Return.
How do I register a business partnership?
You can register your partnership online or through the post using an SA400 form.
You’ll need to use a Government Gateway account to use the online service. You might already have one, for instance because you’re already registered as a sole trader or have set up a limited company, but it’s generally considered a good idea to create a separate Gateway account for the partnership to avoid any confusion.
In order to register the partnership, you’ll be expected to provide the following:
- The partnership’s name (either your own names or a designated one)
- The nominated partner
- The nature of the business
- A business address
- The details of each partner
As well as registering the business itself, each partner must also register with HMRC separately to let them know about the arrangement.
Do I need an accountant for my business partnership?
While enlisting the services of an accountant might not strictly be necessary for running a business partnership (or any kind of business for that matter), it’s certainly advisable.
That is, if you want to make sure you’re being as thorough and tax efficient as possible.
A qualified accountant can walk you through the process of registering, and you’ll be able to call on them for help or advice once your business is up and running.
Things to consider before registering a business partnership
We’ve gone through all the technical bits, so hopefully you’re now a little bit clearer on what a business partnership actually is and how it works.
But nothing we’ve covered so far helps answer the big question: should you go it alone or join forces with at least one other person?
Let’s look at the main pros and cons of being part of a business team.
Pros
They say great minds think alike. If that’s true, why not put those minds together and share the mental burden of running a business?
Not only does this allow you to manage the workload more efficiently, but it reduces the likelihood of mistakes being made, as there will be natural checks and balances in place.
The partners in a business partnership share a responsibility to make sure the business complies with its various reporting requirements, but they must also work as a team to reach the business’s goals.
You can share resources, contacts, knowledge, funding, and more. This side of running a business can be very stressful on your own, and so it can be nice to have “partners” who are in the same boat.
Cons
Whether or not you should start a partnership ultimately comes down to one crucial factor: finding the right person/people to do it with.
Getting this wrong can prove disastrous, and you’d actually be better off by yourself.
The reason for this is that while partnership-based businesses come with a ton of benefits (as outlined above), they can also be torn apart from the inside as a result of a rift forming in the partnership.
No one plans for this, but it can and does happen.
One way to guard against this is by creating a legally binding partnership agreement which details each partner’s rights and responsibilities in a very clear way.
While this is by no means mandatory, it’s certainly recommended and can really help if worst comes to worst.
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
