Business Partnerships are a common business type in the UK, it is a kind of middle ground between the sole trade and limited company.
Deciding whether a partnership business is the right business model for you can be tricky, but it is worth spending some time researching the advantages and disadvantages of each business type before committing to anything.
If you are in the process of comparing business structures, then you may find our guide on limited companies useful. Limited companies do offer some advantages that you should be aware of before deciding.
In this blog, we’ll take a close look at the benefits of a business partnership, as well as some of the disadvantages of this business model. On the face of it, a business partnership enables you to go into business with someone else without the perceived formality of a limited company. On the other hand, partners will be liable for all debts incurred by the partnership.
Less formal and less legal obligations – There is far less formality associated with a business partnership than a limited company. In other words, things are altogether much simpler.
A partnership business does not need to complete a corporation tax return (though you still need to keep accurate records of income and expenses). Instead, a partnership tax return must be submitted to HMRC and each partner must complete their own self-assessment tax return.
Unlike a limited company, you don’t need to complete an annual confirmation statement or any other of the many forms Companies House expects limited companies to complete.
Easier to get started – There is no need to register a business partnership with Companies House and registering the partnership for taxation with HMRC is relatively simple.
Having said that, we do tend to recommend that when setting up a partnership, you put in place a partnership agreement. While taking up more time and adding an additional cost, having documentation that clearly states how the partnership will work, the rights and responsibilities of partners and what would happen in certain situations if things didn’t work out is well worth having.
Share and share alike – There are undoubtedly benefits to going into business with someone else. While a sole trader must carry the full burden of running the business by themselves, partnerships benefit from companionship and mutual support.
The sharing doesn’t stop there though, each partner can share their own knowledge, skills, experience and contacts with each other, potentially giving the business a better chance of success than any of the partners trading individually.
More privacy – The affairs of a partnership can be kept completely confidential, whereas limited companies must make some information public. Limited Company documentation is available for public inspection at Companies House and a company’s shareholders can choose to inspect various registers and other documents the company is required to keep.
Tax efficiency – When in a partnership, you draw profit, as opposed to receiving a salary through PAYE or taking dividends. For this reason, partnerships offer the ultimate flexibility. You can split the profits any way you want.
Partners pay tax on their share of profits which will likely include national insurance payable on their individual tax returns.
If we could sum up the primary benefit of a partnership in one word it would be simplicity. Though, of course, there are some disadvantages such as it being more difficult to raise capital and the business owners being personally liable for any debts or losses incurred.
In truth, many of the disadvantages of partnerships are the advantages of limited companies or sole trades. We recommend that you read our blog on limited companies if you wish to gain a better understanding of the differences between the two.
If you need help and guidance setting up a business and/or choosing a business model, get in touch to book a free, informal consultation. By understanding your business, we can recommend the best business structure for you.