Those entrepreneurs who would like a business partner to share the load often form a partnership. However, the meaning of a partnership has changed as people have added more features to what this special relationship stands for.
There are several different types of partnerships, all with various features. We’ve listed them here so you can choose which one is best for you.
Deciding On a Type of Business
Deciding on your business type is an exciting and necessary step in your entrepreneurial plan. It is important to remember that your business structure will usually expand and evolve as your company grows. Whether your business is a partnership or you are a sole trader, your company type can still change, as eventually, circumstances may mean it becomes a sensible decision to incorporate your business or join forces with another business partner.
How Does a Partnership Work?
A partnership is when a number of individuals each own part of a business. These individuals may be passive investors or active partners who play a role in the everyday running of the business. A partnership agreement outlines how the relationship between the partners will function. In 2020, the UK private sector business population consisted of 414,000 ordinary partnerships (which equates to 7% of all businesses).
To join the partnership, each partner must first invest or “buy-in”. Generally, the losses and profits made by each partner are based on the percentage of the company they own.
How Do Partnerships Compare to Other Types of Businesses?
A partnership is financially and legally binding to its owners. For tax purposes, the money made and lost by the business may be passed through to the owner’s personal income. Normally corporations are more difficult and more expensive to set up in comparison to a partnership. Partnerships also often get away with paying less tax in contrast to corporations due to pass-through taxation.
So what are the different types of business partnerships?
General Business Partnerships
The simplest partnership is a general business partnership, which is normally set up by a group of sole traders.
A business partnership is simply an agreement between people who plan to work together and does not have legal status. However, it is a legal requirement that each partner completes a separate tax return, registers for self-assessment and registers the partnership with HMRC.
Advantages:
Each partner pays tax on their share of the business’s profits.
Disadvantages:
Each partner is liable for any business losses, meaning if one partner is unable to pay, the other partners will have to cover their share of the debt. This could put the other partners’ assets at risk.
Limited Partnership (LPs)
Limited partnerships consist of at least one limited partner and one or more general partner. The general partner is usually in charge of the limited partners and the business. Generally, a limited partner’s liability is limited to their level of investment and they have nothing to do with the daily management of the partnership.
Advantages:
A limited partner is an individual who typically has no desire to participate in the business other than to invest capital and receive their portion of the profits. If, for example, a friend or relative wants to invest in your business, then a limited partnership may be a good option.
Disadvantages:
As passive investors who do not take part in management, limited partners cannot sustain losses that are more than their annual income
Limited Liability Partnership (LLPs)
A limited liability partnership (LLP) is more similar to a limited liability company (LLC) than other types of partnerships. An LLP consists of partners with limited liability who pool their resources and share space to save money.
Advantages:
General partners in an LLP have limited liability, which is different from a limited partnership.
Disadvantages:
Some businesses or individuals may avoid doing business with this type of partnership because the partners have limited liability.
What Should You Consider Before Starting a Partnership?
The following points should be considered before starting a partnership:
- It is a good idea to have a partnership agreement — Having each partner’s solicitor outline a partnership agreement is a good way to begin your partnership. This agreement can help you clearly define who is responsible for what — and what happens if you decide to stop working together.
- Don’t forget about added expenses — Since it’s a good idea to have a solicitor give your partnership agreement a once-over, make sure you include any additional expenses.
- You must trust your partners — Only go into business with a partner you can trust, as all partners are responsible for any debt or poor business decisions incurred.
- Consider who you will be employing — It might be a good idea to get some advice from a tax consultant. If you intend to employ people earning more than the owners, then a limited company might be the best choice for you. However, if your business has a few members who earn a similar amount, then an LLP could be the better option.
How to Form a Business Partnership?
Partnership businesses are easy to set up, which makes them attractive to many business owners. A partnership could be a good option for you as long as you are okay with having unlimited liability. Some companies, like a photography business, may not have as much need for liability protection as others, such as a doctor.
Our formation application process is entirely online and takes just minutes. We typically register your business partnership in under six hours, although these times will depend on Companies House and how busy it is on the day. Our experts will also help you register the business for self-assessment with HMRC and VAT if your yearly turnover will exceed £85,000. You must register separately as an individual.
Want to start a business partnership? Contact Mint Formations today to form your partnership now!
