This is similar arrangement to the Sole Trader, but with more than one owner. The partners own the assets, share the profits and the losses of the business, and often share the management functions of the business. However, and of particular importance, each partner is responsible for not only his share of the losses, but all of the losses of the business. Therefore, there needs to be a high degree of trust between the partners and, if possible, a written agreement (see below) between them, setting out their respective rights, obligations and liabilities.
From a tax perspective, a partner will be taxed on his share of the profits, not the entire profits of the business.
As far as formalities are concerned a partnership must
- maintain books of account
- pay tax
- if there are employees, register with HMRC as an “employer” and
- if business turnover exceeds £83,000 a year, register for VAT
Partnership Agreements: As Partnerships operate very much on a trust basis it is strongly recommended to have in place a partnership agreement between the owners. This will set out each partner’s rights and liabilities (for example, each partner’s share of the profits and liabilities, the work expected of them and whether the activities of the business should be subject to any restrictions). It can also govern the manner in which the business is carried on. Without a written agreement the partners will generally have equal rights and liabilities, but the benefit of an agreement is that it can provide for so much more, with measures designed to protect the business if a partner leaves, and to provide a route to retirement of a partner with minimal disruption to the business.
An investment in a partnership agreement when a partnership is formed can save time, money and effort if things were to go wrong between the partners in the future, or if, for example, one of them were to die prematurely, when, without an agreement in place, the business would have to be dissolved.
The TSP team can help you with putting a partnership agreement in place. If you are currently in business in a partnership and do not have an agreement in place, it is not too late to arrange one, so please do get in touch here.