What is a Partnership (Self-Employed)

A partnership is a business run by two or more people together. There should be a written agreement detailing this arrangement. Profits are usually shared between partners according to the agreement. Although profits may be shared unequally, liabilities which may arise are shared jointly. This is something that everyone involved should be very clear about. Even if you only own 1% of the business you will still be responsible for 100% of the liability.

A partnership is a very risky type of business to get involved in, just because of all the potential for conflict, and the financial effect conflict between partners would be likely to have on the business.

Types of partners

There are three main types of partner, each of which has different rights and responsibilities.

General partners invest in the business, take part in running it and share in its profits. Each general partner is fully liable for any debts that the partnership may have. This means that they could lose more than their initial investment in the business if it runs into trouble, and that their personal assets could be at risk. Every ordinary and limited partnership must have at least one general partner.
Limited partners are not permitted to participate in the day-to-day running of the business. Their debt is limited to the amount of their initial investment.
Sleeping partners invest money in the business and share in its profits, but do not take part in running it. Like general partners, they are fully liable for the partnership’s debts.

Companies and limited liability partnerships (LLPs) as members of partnerships

As well as individuals, other legal entities – such as companies and LLPs – can also be members of partnerships. They have the same rights and responsibilities within the partnership as other partners.

Tax matters of a partnership

The profits and gains of the partnership are shared among the partners. Each is personally responsible for paying tax on their share.

The nominated partner must register the partnership for business taxes with HM Revenue & Customs (HMRC). They can do this online.

Each partner must also register themselves for Self Assessment and National Insurance. The partnership and each partner will each then receive their own Unique Taxpayer Reference for Self Assessment. HMRC will then set up the right tax and National Insurance records for both the partnership and partners.

Every year each individual partner will need to complete a Self Assessment tax return to show the profits they get from the partnership.

The partnership should appoint one of its officers – the nominated partner – to fill in the Self Assessment Partnership Tax Return and send it to HMRC. This includes a Partnership Statement, which shows how profits or losses have been divided among the partners. The nominated partner should also ensure that all other officers are given copies of the Partnership Statement to help them complete their own tax returns. Although the nominated officer has responsibility for the Partnership Tax Return, all the partners are jointly liable for any penalties resulting from it being submitted late or incorrectly.

National Insurance contributions

As well as being responsible for their tax, individual partners are also responsible for paying their own National Insurance contributions (NICs). Partners normally have to pay Class 2 National Insurance contributions. If their annual profits are over a certain amount they also pay Class 4 contributions.

Corporation Tax

If partners are companies, they must pay Corporation Tax on their profits from the partnership, and should record the relevant figures on their Corporation Tax return.

Tax returns

Tax returns covering income for the year ending 5 April 2012 have to be submitted to HM Revenue & Customs by the ‘filing date’ which is 31 October 2012 for paper returns and 31 January 2013 for online returns. The return will include a self assessment of your liability to income tax and capital gains tax.

There are automatic penalties for late filing of tax returns.

Payment of tax

Payments on account of income tax and Class 4 national insurance contributions (NICs) will be due on 31 January 2012 and 31 July 2012. These interim payments will be based on one half of the total liability (less any tax deducted at source) for 2010-11. You will have the right to reduce payments on account if you believe the income tax for 2011-12 will be lower.

The balance of income tax for 2011-12 is due on 31 January 2013 (along with the first payment on account for 2012-13 and any capital gains tax for 2011-12).

Interest and surcharges will be levied for late payment.

Business Partnership Advantages

• Partnerships are relatively easy to establish.

• With more than one owner, the ability to raise funds may be increased, both because two or more partners may be able to contribute more funds and because their borrowing capacity may be greater.

• Prospective employees may be attracted to the business if given the incentive to become a partner.

• A partnership may benefit from the combination of complimentary skills of two or more people. There is a wider pool of knowledge, skills and contacts.

• Partnerships can be cost-effective as each partner specializes in certain aspects of their business.

• Partnerships provide moral support and will allow for more creative brainstorming.

Business Partnership Disadvantages

• Business partners are jointly and individually liable for the actions of the other partners.

• Profits must be shared with others. You have to decide on how you value each other’s time and skills. What happens if one partner can put in less time due to personal circumstances?

• Since decisions are shared, disagreements can occur. A partnership is for the long term, and expectations and situations can change, which can lead to dramatic and traumatic split ups.

• The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

• A partnership usually has limitations that keep it from becoming a large business.

• You have to consult your partner and negotiate more as you cannot make decisions by yourself. You therefore need to be more flexible.

• A major disadvantage of a partnership is unlimited liability. General partners are liable without limit for all debts contracted and errors made by the partnership. For example, if you own only 1 percent of the partnership and the business fails, you will be called upon to pay 1 percent of the bills and the other partners will be assessed their 99 percent. However, if your partners cannot pay, you may be called upon to pay all the debts even if you must sell off all your possessions to do so. This makes partnerships too risky for most situations. The answer would be a different business structure.

Our Services

  • Advice on setting up a partnership and registration with HMRC.
  • Advice on tax and national insurance implications.
  • Book-keeping Services.
  • Advice on allowable expenses i.e subscriptions, spouses salary, use of home, travelling expenses e.t.c.
  • Preparation of annual accounts.
  • Preparation of partnership tax returns.
  • Preparation of Individual Tax Return.
  • Payroll for Employees/Spouse
  • Tax Calculations and Tax Planning.