They’re often exciting, but how do you know whether a business partnership is right for you? What are the advantages and disadvantages?
Just like how we did in a previous blog where we examined the benefits of running a business as a sole trader versus a limited liability company, here is everything you need to know about business partnerships.
How do business partnerships work?
Partnerships are a form of business association in which two or more people work together in partnership to conduct business. You can share all profits between yourselves, and each partner pays tax on their share.
There are two types of business partnership: general partnerships and limited liability partnerships (LLPs).
In a general partnership, all partners can actively manage or control the business. Unless the partners have a partnership agreement, each one will have equal authority. Meanwhile, they are personally liable for any debts the business cannot pay.
LLPs, meanwhile, require a partnership agreement, while limited partners do not have the authority to run the business – they are more or less an investor in the business. Limited partners are only liable for the amount of money they invested in the business, rather than all debts. However, that doesn’t apply to general partners (the ones managing the business).
Business partnership taxes
In a partnership, each partner has to file a self-assessment tax return and fill in the supplementary pages too, depending on what types of income the partnership has.
The nominated partner (the one who set up the partnership), must also complete a partnership return, showing each partner’s share of the profits and losses. They have to send it as well, but all partners are liable for any penalties and interest if the return is late or inaccurate.
This is the case for both regular and LLPs. Yes, you read that right – an LLP as an entity is not taxable, but the members are. So, no company return and no corporation tax for LLPs.
Benefits of a business partnership
There are many benefits of running your business as a partnership, rather than going it alone.
First, two heads (or more) are better than one. A good partnership will be made up by people with complementary skills. The strongest partnership will be formed where each member brings their individual strengths, skills and knowledge to the table.
Partnerships are, generally speaking, also easier to establish if you’re doing it with other people. Part of that is because the start-up costs are often lower – the more partners there are, the less each one will have to invest. Partnerships also tend to have greater borrowing capacity.
However, you should only enter a partnership if you’re comfortable with sharing responsibilities. You definitely need to be a team player, able to compromise and a good mediator for when disagreements occur.
Talk to us about your business partnership.
