Tax & admin · 28 August 2020

What is the difference between a partnership and a limited company?

If a business partnership is unsuccessful, you will hold financial liability for its debts
When launching a new venture, you will want the business to be legally recognised. But which structure is right for you? Here we explain the difference between a partnership and a limited company, with consideration of the advantages and disadvantages of either arrangement.

What is a partnership?

A partnership refers to two business partners sharing joint responsibility for a company. Unless a partnership agreement explicitly dictates otherwise, partners are jointly responsible for all losses and profits in the business, and both pay taxes on their share of profits.

Partners also share responsibility for all liabilities and debts associated with the business as individuals, and any bills for assets like stock and equipment.

However, a partnership does not legally have to be between two actual people. Somebody could register a limited company as a partner because a limited company is considered a legal person? by the government.

To set up a business partnership, the founder only needs to choose a name for the partnership, a nominated partner? (whether another person or a limited company), and to register the business with HMRC.

View from a freelancer

“I went freelance earlier on this year and then opted to register as a limited company (50% shares owned by me, 50% by my husband). I was a bit overwhelmed initially with all the additional paperwork required, and I think getting into the mindset that the company’s money isn’t your money is quite a transition for sole traders to make.

“But it’s been a really positive move for us. Registration was straightforward, I bank with Tide (which took minutes to set up amazingly) and I’m seeing benefits like better phone deals for businesses than personal phones and what not.

“Next step – VAT registration. Let’s see if I’m still tearing feeling as positive after that, eh?”
? Stacey MacNaught, freelance SEO consultant

What is a limited company?

The central feature of a limited company is the legal separation from those who run it. For example, its directors are not liable for company debts. Financial responsibility lies with its shareholders.

Although day-to-day running of a limited company is the responsibility of its directors, it is legally owned by its shareholders. Shareholders and directors may be completely different people.

Usually, a shareholder’s liability is proportionate to the price paid for their shares. If a limited company was to fold, the most a shareholder would lose is the amount paid for their shares.

A limited company operates within its own right, and can employ staff, own property and enter legal disputes as its own entity.

What’s the key difference between a partnership and a limited company?

The key differences between a partnership and a limited company lie in the structure.

While owners of a business partnership are liable to the company’s debts, directors of alimited company are not personally responsible.

Although a business partnership only needs to notify HMRC of its operations, limited companies must be registered at Companies House.


 
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ABOUT THE EXPERT

Praseeda Nair is the editorial director of Business Advice, and its sister publication for growing businesses, Real Business. She's an impassioned advocate for women in leadership, and likes to profile business owners, advisors and experts in the field of entrepreneurship and management.

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