Tax & admin ยท 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 a?limited 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.

For a young company, the partnership structure is often favoured for tax purposes. Rather than receiving a salary through PAYE, partners take earnings from the company’s profits (sales), and they are also exempt from National Insurance contributions (NICs).

A limited company, on the other hand, must pay corporation tax on its income to HMRC, and file annual returns at Companies House.

If a business partnership is highly successful, its partners could see a great financial benefit. However, personal finances are on the line, and if the business went under, financial stability ? whether it’s mortgages or savings ? is at risk.

View from a limited company

?When I decided to strike out alone back in 2017 I registered as a sole trader, which at the time was the right decision. However, eighteen months in, I have a much larger client base and I?m beginning to think about what the future might look like for McCallum PR.

“Incorporating the business is very much about equipping myself for the future and facilitating the growth that isn?t possible as a sole trader. Operating as a LTD company not only makes sense financially, but it brings important benefits like Limited Liability Protection, which is particularly important to me since I have a young family to take care of. The more onerous reporting responsibilities and the loss of privacy were initially off-putting but incorporation is an essential next step.

?While some claim that companies can be reticent to work with a sole trader, it isn?t something I?ve experienced having built a client base that includes startups through to PLCs.?

? Emma McCallum, director, McCallum PR

This article was originally published on 27 September 2018.

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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.