A business partnership is a profit-making business structure that is co-owned and managed by two or more ‘partners’ who share a common goal. They work together to advance their mutual interests and make the business a success. However, the suitability of a partnership depends on a variety of factors, so we’ll discuss the pros and cons to help you to decide whether it’s right for you.
We will also explain the different types of partnerships available, which are:
- ‘Ordinary’ business partnership
- Limited partnership
- Limited liability partnership (LLP)
Each of these models has the same basic framework, but they vary in terms of their legal status and the levels of personal liability placed upon partners, so it’s vitally important to understand the differences between them.
Advantages of setting up a business partnership
A business partnership model offers a number of advantages to certain professionals – those who typically set up businesses with other people working in the same profession. They include doctors, dentists, solicitors, surveyors, architects, engineers, and other specialised service providers.
By setting up a business partnership, highly skilled individuals are able to combine forces, benefit from shared expertise and responsibility, and create a stronger, more competitive business entity than working alone.
Below, we outline the most significant advantages of running an enterprise as a business partnership.
1. Easy to set up
An ‘ordinary’ business partnership, which is the most popular choice, is really easy to set up because it doesn’t have to be incorporated at Companies House. Only limited partnerships, LLPs, and limited companies are required to incorporate – i.e. be formed as distinct legal persons that exist independently of their owners.
To set up an ordinary partnership, you simply need to register the business for Self Assessment with HM Revenue and Customs (HMRC). You can do this for free online.
Each partner must also register separately for Self Assessment. This is because partners are treated as self-employed for tax purposes, so their individual earnings must be reported and taxed separately from one another and from the partnership.
2. Shared responsibility
Running a business partnership allows you to share financial and operational responsibility with other partners whilst each retaining your own earnings (share of profits).
There’s strength in numbers, so you and your business partners will benefit from mutual support and contribution, collective decision-making, and sharing the inevitable burden of owning a business.
Additionally, when one person takes annual leave or is unwell, there is no need to close the business during their absence – the remaining partners can carry on running the partnership uninterrupted.
3. A wider pool of resources
Running a business partnership is the perfect way for experienced individuals to build effective collaborations – combining their unique but complementary skills, expertise, knowledge, and professional contacts for the purpose of achieving a common goal.
It enables everyone to make the most of their own strengths and abilities for the benefit of the entire partnership. For example, one partner may have a natural flair for sales and networking, whilst another may be adept at bookkeeping and accounting. Therefore, each partner can assume responsibility for the tasks in which they excel.
Ultimately, your business will enjoy a much greater chance of success if you pool resources with other like-minded professionals. Those with whom you can work harmoniously, who share your vision, and who bring something uniquely valuable to the table.
4. Potential for a larger client base
By operating a business partnership with other skilled professionals, you will benefit from a larger client base overall and will be in a stronger position to bid against competitors for bigger contracts.
Collectively, you can accommodate more business and offer a wider range of skills, knowledge, and experience to existing and potential clients than if you were to work alone. As a result, your business could also receive far more referrals.
5. Greater flexibility
A business partnership usually offers greater flexibility than operating as a limited company. Aside from being easier to form, partnerships are often easier to manage because:
- they are less strictly regulated than companies (particularly if you set up an ordinary partnership, as opposed to an LLP)
- the partners are the only people who have any influence and control over the business (i.e. no outside investors/shareholders)
- the organisational structure of a partnership is more versatile, which means that it’s easier to make changes to partners’ responsibilities and rights (including profit entitlement) should the need ever arise
However, given that partnerships are less strictly regulated, it’s always advisable to draw up a partnership agreement. This sets out how the partnership should operate, the rights and responsibilities of partners, how decisions should be made, and strategies for certain eventualities. For example – resolving disputes, partner resignation, selling, or winding up the business.
6. Simpler administration
The administration involved in running a business partnership (particularly an ordinary partnership) is much simpler than it is for limited companies. It differs depending on the type of partnership you set up, but overall you will have far fewer record-keeping, filing, and reporting obligations. In general, the accounting process is also easier.
Disadvantages of setting up a business partnership
Whilst a partnership structure can provide many benefits, there are inevitably some potential downsides to be aware of. It’s important to weigh up these pros and cons to get a clear picture of what’s on offer. So, now we’ll look at the most common disadvantages of setting up a business partnership.
1. Personal liability
Liability for business debts depends on the type of partnership you choose to set up. So, you must understand the level of financial responsibility you’re taking on.
In an ordinary partnership, every partner is subject to unlimited liability. There is no legal separation between the partnership and its owners – they are the business. This means that partners share personal liability for any and all business debts and legal obligations.
If you form a limited partnership, your liability depends on what type of partner you are. Limited partners are only liable for debts up to the value of assets (i.e. money, property) they’ve contributed. General partners, on the other hand, are liable for any and all debts that the business is unable to pay.
If you form an LLP, you will enjoy limited liability. This is because an LLP is a legal ‘person’, so LLP members (partners) are not responsible for debts of the business. You only risk losing what you’ve already invested, which is a standard risk with any type of business.
Whatever type of partnership you decide to form, you can protect yourself further with professional indemnity insurance, which is highly recommended.
2. Fewer tax-saving options
One of the most notable disadvantages of a partnership, when compared to a limited company, is that partners are treated as self-employed for tax purposes.
Just like sole traders, partners must register for Self Assessment, prepare their own annual tax returns, and pay Income Tax and National Insurance on the earnings (share of profits) received from the business.
This may result in paying more personal tax than you would through a limited company, particularly if your earnings are above a certain level (i.e. if you are a Higher or Additional rate taxpayer).
Furthermore, you will not enjoy the same tax-planning opportunities that are available to limited company director-shareholders. For example, deferring the withdrawal of profits until a later tax year, distributing dividends to spouses and/or children, and accessing directors’ loans.
3. Cannot make decisions on your own
Naturally, setting up a business partnership means that decisions must be taken jointly with other partners. You own the business together, so you need to consult one another, discuss options and preferences, and make decisions together
This can be time-consuming and frustrating if you have conflicting views on certain things, but it’s unavoidable in a partnership. That being said, it’s not always a bad thing to have different ideas and suggestions.
Collaborative working makes us consider alternative perspectives and approaches, which can have a positive impact on the success of a business.
4. Greater potential for internal conflict
Another potential disadvantage of setting up a business partnership is the risk of disagreements arising between partners. This is to be expected, but it’s important to minimise the potential for serious disputes that could harm the business and the relationship between partners.
This is another reason why it’s essential to draft a strong partnership agreement, which should include clear guidance on everyone’s roles, the objectives of the business, how decisions are made, and how to resolve disagreements.
5. Required to share profits
In a business partnership, you can share profits between partners in any way you like, provided that everyone is in agreement. Some partnerships choose to split profits equally or at varying percentages, whilst others may distribute income to partners according to the work they do (e.g. dentists who have separate patient lists).
Profit distribution can sometimes lead to disagreements or resentment if it’s not based on fairness, for example, if profit is split equally but one person invests more capital, time, and/or effort than other partners.
The easiest way to avoid disparity and disputes is to ensure that your profit-sharing structure accurately reflects the contribution of each partner.
Information about the division of profits should be clearly set out in your partnership agreement, which can be altered and amended at any time to reflect changes in the business.
6. Less prestigious
Unincorporated businesses, like ordinary partnerships and sole traders, have always been viewed as less prestigious than limited companies and LLPs. This is simply because they are less rigorously regulated and they don’t have to disclose ownership details or financial information on public record.
Consequently, the lack of legal independence and corporate transparency can create a sense of impermanence. This may be a deterrent for more discerning or risk-averse prospective clients (particularly if they themselves are an incorporated business).
The way in which your business is perceived by your target customer base is paramount. So, you must consider whether the legal structure of your business will impact its potential for long-term success – especially if you’re going to be operating in a fiercely competitive industry.
Different types of partnerships
There are three main business partnership structures that you can set up in the UK. They share a similar framework but with important differences.
Ordinary business partnership
An ordinary business partnership, sometimes referred to as a ‘general’ or ‘traditional’ partnership, is registered at HMRC. There is no legal separation between the business and the partners.
You and the other partner(s) are personally and jointly responsible for owning, controlling, and managing the business. This means that all partners are personally responsible for the liabilities of the business (e.g. debts, contractual obligations, lawsuits, legal expenses).
Limited partnerships need to register with Companies House and HMRC. They must have at least one general partner and one limited partner, who have different levels of responsibility and liability.
Limited partners contribute assets (capital or property) to the business, are only liable for debts up to the value of those assets, and are unable to manage the business.
General partners are responsible for controlling and managing the partnership and they are liable for any debts that the business is unable to pay.
Limited liability partnership (LLP)
A limited liability partnership is registered at Companies House. It is a legal ‘person’ that exists independently of its owners (partners). It’s like a cross between an ordinary partnership and a limited company.
This makes it very popular with professionals who want to operate as a partnership but have the safety net of limited personal liability for business debts and lawsuits.
You get the flexibility of the partnership model with the financial protection and professional prestige of a limited company. This makes it ideal if you’re going to be working on high-value contracts, for example.
How to set up a business partnership
The way in which you set up a business partnership depends on the type of partnership you want to form.
Register an ordinary partnership
To set up an ordinary partnership, you need to register the partnership for Self Assessment with HMRC using the online service or by completing form SA400.
The registration process is very straightforward and free of charge. You will be asked to provide a business name, information about the partnership, and details of partners.
Additionally, each partner must register themselves for Self Assessment.
Register a limited partnership
To set up a limited partnership, you need to file an application to register a limited partnership with Companies House. This must be downloaded and delivered by post. It costs £20.
You also need to register the business for Self Assessment with HMRC, which you can do online. Each partner is required to register themselves separately for Self Assessment.
Register a limited liability partnership (LLP)
To set up a limited liability partnership, you must incorporate an LLP at Companies House and register the partnership for Self Assessment with HMRC. Additionally, each LLP member (partner) must register themselves separately for Self Assessment.
At Rapid Formations, we can set up your LLP online for only £29.99. This includes a free LLP Agreement, a free Business Bank Account, and much more.
We also provide a range of impressive company address services, including a London Registered Office, and many additional corporate services that make it easier for company and LLP owners to meet their statutory duties and run their businesses efficiently.