How to Form a Business Partnership

If you don’t want to start a business on your own, a partnership may be a good option. Follow this guide to find out everything you need to know about the requirements and responsibilities of setting up a business partnership.

What is a Business Partnership?

Partnerships require at least 2 people to set up. The partners share profits, keep records of income and expenses, and produce taxable income.

Types of Business Partnerships

These are the four types of partnerships.

General Partnership

A general partnership is the most basic form of partnership, usually formed by signing a partnership agreement. Ownership and profits are usually split evenly between the partners. In a general partnership, partners have independent power to bind the business to contracts and loans. Each partner is personally responsible for all the business's debts and legal obligations. General partnerships are easy to form and dissolve. In most cases, the partnership dissolves automatically if any partner dies or goes bankrupt.

Limited Partnership

Limited partnerships are formal business entities with at least one general partner who is fully responsible for the business and one or more partners who provide money but do not actively manage the business. Limited partners are not responsible for their debts and liabilities, partners can share in the profits, but they cannot lose more than they've invested. If they begin actively managing the business, they may lose their status as a limited partner.

Limited Liability Partnership

A limited liability partnership is like a general partnership, with all partners actively managing the business, but it limits their liability for one another's actions. The partners still bear full responsibility for the debts and legal liabilities of the business, but they're not responsible for their fellow partners.

Limited Liability Limited Partnership

A limited liability limited partnership operates like a Limited Partnership, with at least one general partner who manages the business, but limits the general partner's liability so all partners have liability protection.

What Are the Benefits of a Business Partnership?

• Fewer taxes: Each member of the partnership must report their own income and losses on their tax returns instead of paying a corporate tax.
• A larger capital: Business partners combine their resources to form a business partnership, resulting in more capital and a larger investor pool. A business partnership can also make it easier for partners to borrow and save funds.
• More contacts: Business partners also share professional connections, creating a more extensive and diverse network of fellow professionals. A business structure can also attract more partners and employees because it denotes professionalism and credibility.
• Additional perspective: Business partnerships also combine the experience and expertise of their members, which can provide greater inspiration for new ideas.

Steps to Form a Partnership:

Choose your partners

When it comes to starting a partnership, you must choose your partners wisely, and look at things like

• Skills and strengths
• Knowledge
• Credibility

You’ll likely also want to pick a partner who is financially stable, shares the same vision as you, and can offer resources for the partnership.

Determine your type of partnership

Each type of partnership has its own pros and cons. Discuss the types of partnerships with your partners to determine which one is the best fit.

Come up with a name for your partnership

Depending on your partnership type, you may need to include a combination of the partners’ names in your business name. After coming up with a business name, check to make sure that another business does not already take it. You can search for the name online, check domain names, and run a trademark search.

Register the partnership

The partnership can be registered with HMRC online, or you can choose to complete the SA400 paper form. Once the partnership is registered, the nominated partner will be asked to complete an annual tax return on behalf of the partnership. Each partner will also need to register as self-employed with HMRC individually. They will then be asked to complete an annual self-assessment tax return detailing their income from both the partnership and other sources throughout the tax year.

Unlike limited companies which are required to register with Companies House, there is no need to register your partnership as a company or to contact Companies House.

Establish a partnership agreement

When you create a partnership, you need to narrow down roles, responsibilities, and liabilities. To do that, you and your partners must establish a partnership agreement. A partnership agreement is legally-binding and lays out each partner’s role, liability, and profit distribution. You can refer to your agreement during conflict and use it to find resolutions.

Agreements vary from business to business and typically depend on the type of partnership you form.

Obtain licenses and permits, if applicable

Before you can begin operating, you may need to obtain certain licenses and permits, depending on business requirements.

Open a business bank account

As a business owner, keep your partnership’s finances in tip-top shape by creating a separate bank account for the business.

Choose an accounting option

Manually recording transactions is a great option if you’re on a budget. However, it is more time-consuming than other accounting options.

Hiring a bookkeeper gives you peace of mind knowing that your books are in good hands and are accurate. But it is the most expensive option.

Accounting software is more affordable and helps you streamline accounting processes so you can get back to your business.

Starting a business partnership is often seen as an attractive way to go into business with one or more other people. Each partner has an equal share of the business, as well as equal responsibility for any debts that the business accrues.

However, a partnership isn’t right for everyone, so it’s important to be sure that this is the right way to start your business before starting your business and registering your partnership with HMRC.

Paramount Formations are on hand to provide additional information and guidance for all your business needs. Contact us using our contact form or call our friendly expert team on 0800 0198 698.