If you decide to go into business with another person, you might decide to start a partnership. Before you can begin trading, you need to understand how to set up a partnership and to ensure that you have complied with the legalities surrounding running your business in this way.
In this article, we’ll tell you everything that you need to know about starting a partnership, from exactly how you go about setting up your business partnership to the legal considerations you’ll need to make before you begin trading. You’ll be left feeling confident about setting up your new business, so that you can look forward to the future.
What Is A Business Partnership?
A business partnership is formed when two or more self employed individuals come together to create a business, without setting up a limited company. These partners agree to share the costs, risks and responsibilities of running the business, and the profits are usually shared equally between the partners, unless the partnership agreement states differently.
Partnerships offer a simple and flexible way to start a business with one or more other people. However, a partnership doesn’t have its own legal status, as its simple a way of linking two or more people in a business structure without the confines of a limited company. If you would prefer your new business to have its own legal identity, you’d need to set up a limited company instead of a partnership.
Whilst it’s recommended that you have a partnership agreement to set out roles and responsibilities within your business, this is not a legal requirement. The only legal requirement is that the partnership is registered with HMRC for tax purposes, and that each partner completes an annual self assessment tax return.
But how do you go about setting up a partnership and what should you consider before doing so? Read on to find out.
How Do You Set Up A Partnership Business?
So, you’ve decided to set up a partnership to run your business. But how do you go about doing so? Whilst there’s no formal process that you need to follow for setting up a partnership, there are some key steps that you’ll need to go through to ensure that your partnership is set up properly.
Let’s take a look at the process of setting up a business partnership.
1. Choose A Name For Your Business Partnership
As with any business, you’ll need to choose a name for your new partnership. This is one of the most exciting parts of starting your business, but it can be hard to know where to start.
Some partnerships may choose to use the names of the partners in the business name, for example Holland & Barrett. However, this is not a requirement, and you can choose a name that you think best represents your business.
It’s important to note that the name that you choose for your business cannot be deemed to be offensive and should not contain any sensitive words. Sensitive words are words that imply that the business has a special status, for example ‘council’, ‘authority’ and ‘chartered’. You should also avoid using terms such as ltd, limited or plc, as partnerships are not incorporated companies.
Finally, you’ll also need to ensure that the name of your partnership does not include any trademarked terms. For example, you wouldn’t be able to call your brand ‘Apple Technology Services’.
2. Register As Self-Employed With HMRC
When you set up your partnership, one partner will need to become the ‘nominated partner’. This nominated partner will be responsible for registering the partnership with HMRC for tax purposes. This must be done by the 5th October during your business’ second tax year. So, if you start your partnership business during the 2022-23 tax year, your nominated partner will need to register your partnership with HMRC by 5th October 2023.
Each partner of the business will also need to register with HMRC individually as self employed. They will then be asked to complete a self assessment tax return each year to declare their earnings. Again, this needs to be done by 5th October in the second tax year.
3. Consider Roles And Responsibilities
Many people decide to form a partnership thanks to the unique skills that each business partner can bring to the table. For this reason, it’s important that you consider what role each partner will have in the business and where responsibilities will lie. You’ll also need to consider whether the profits and risk will be shared equally between each partner, or whether there will be a defined split.
We’d always recommend creating a partnership agreement that is signed by each partner in the business. This will set out roles and responsibilities of each partner, as well as defining the split when it comes to profits and risk. It’s a good idea to consult a specialist business lawyer when drawing up your partnership agreement, to ensure that it has all been done correctly. No matter how well you think you know someone, you can never guarantee what will happen later down the line.
4. Register For VAT
Value Added Tax, more commonly known as VAT, is a tax that is applied to many goods and services in the UK. Every business that has a turnover of over £85,000 has a duty to register for VAT. Once the business is registered, they will charge VAT on all qualifying sales. The VAT collected will then be handed over to HMRC. VAT registered businesses can then claim their own VAT payments back on business purchases.
The VAT threshold is currently set at £85,000. If you expect your business turnover to reach the VAT threshold in any 12 month period, you must register for VAT with HMRC. You will then be asked to complete VAT returns and begin charging your customers VAT on qualifying purchases.
How Does Tax Work As A Partnership?
You may be pleased to learn that tax as a partnership is relatively straightforward. When you set up your partnership, each partner will need to inform HMRC that they are self employed and register for self assessment. They’ll then be asked to complete an annual self assessment tax return to declare their income from the business, as well as any other personal income that they have received.
One partner of the business will be named as the nominated partner. The nominated partner will be responsible for registering to partnership with HMRC, as well as completing an annual tax return on behalf of the partnership.
If you’re unsure about how to manage your tax responsibilities for your partnership, or if you have any questions regarding business partnership tax, we’d always recommend consulting an accounting. They will be able to talk you through your responsibilities and ensure that you are complying with the relevant legal requirements.
Legal Considerations In A Partnership
There are a few things you’ll need to consider when it comes to the legal side of your partnership. After all, none of us want to find ourselves on the wrong side of the law, or caught out by things we’d overlooked.
Firstly, it’s important to understand that if one of the partners decides to withdraw from the partnership, for example if they die, become bankrupt or resign, the partnership will need to be dissolved with immediate effect. This does not mean that the business has to stop trading, but the partnership can only exist with the partners as it has no legal status as a separate entity.
Whilst you’ll probably enter your partnership with the right intentions, there’s no guarantees when it comes to what will happen later down the line. If one partner decides that they want to leave the partnership or to take the business in a different direction, you could find yourself facing conflict or difficult decisions.
The best way to protect the interests of your partnership and to avoid any disputes later down the line is to draw up a partnership agreement. This agreement should set out exactly how the business will operate, how much each partner is investing in the business, the roles and responsibilities of each partner, how risk will be managed and how future changes will be dealt with.
The Partnership Act 1890 sets out both the rights and the duties of individuals that form a partnership. However, this legislation should not be relied upon as a replacement for a detailed partnership agreement.