How business partnerships work
Some say that two heads are better than one, and there’s no reason why setting up a business partnership can’t be a recipe for success. But what are business partnerships and what are the things to consider when entering into one? Let’s take a closer look at how business partnerships work.
What is a business partnership?
A business partnership is where you personally share responsibility for a business with one or more partners. This includes any profits the partnership makes, as well as any losses, and the ongoing running costs – from equipment to marketing. Partners also pay tax on their own share of profits.
What kind of business partnerships are there?
There are three types of business partnerships you may wish to consider:
- General partnerships. In a general business partnership, each partner is self-employed and pays tax on their share of profits. As we’ve already covered, each partner is equally responsible for the business – in the good times and the bad – and usually has equal liability for debts and any legal obligations.
- Limited partnerships. A limited partnership is where there is at least one general partner, and one (or more) limited partner. The former are responsible for the day-to-day running of the business, whereas the latter act in the role of investors and can’t make management decisions, or incur debts.
- Limited liability partnerships (LLPs). In a limited liability partnership, there is no general partner, and each partner has the chance to make decisions regarding the business’s operations. In an LLP, partners may have a reduced level of financial responsibility in terms of debts and losses compared to a general partner in a limited partnership.
A general partnership is arguably the most common type of business partnership, which is why we’ll be focusing on how to create a general business partnership for the majority of this guide.
Things to consider when entering into a business partnership
Compared to going it alone, setting up a business partnership could take some weight off your shoulders as you plan to grow your business. But before you approach a potential business partner, there are some questions you may want to ask yourself.
- What is the potential for conflict? In a general partnership, all partners have equal responsibilities and rewards, so it may be harder for one person to take control of decisions.
- How quickly do you want your business to get off the ground? A general partnership could be quicker to set up than a more ‘formal’ limited partnership or LLP arrangement.
- How much admin can you cope with? If you don’t want to spend time doing administrative chores – like company returns – you may find that a general partnership could be a way to banish the bureaucracy. That’s because a general partnership may not have the same responsibilities as running a limited company, like registering the business with Companies House or paying Corporation Tax.
- How much security do you need? One potential disadvantage with a general partnership is that if one of the partners quits, the partnership may dissolve if there is no agreement on the terms of the exit in place.
3 steps to setting up a business partnership
We’ve covered how business partnerships work, but what are the processes to follow when getting your partnership up and running? Here are three simple steps.
- Name your business. You can either trade under your own names, or a business name. The name can’t be offensive or an existing trademark. Read more at GOV.UK
- Choose a nominated partner. This is the person who will be responsible for keeping business records and managing partnership tax returns.
- Register the partnership. The nominated partner must register the partnership for Self Assessment with HMRC.
More guides from Tyl
Whether you’re setting up your business as a lone ranger or through a partnership, words of wisdom can be invaluable. Read our small business guides over at Tyl Talks for more insights to help with the day-to-day running of a company.
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
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