Setting up a partnership

Last updated: December 2020 | 4 min read

Whichever of the several types of partnership you choose for your business, it’s important to set it up correctly so as to comply with any legal requirements, and more importantly to help avoid future disputes.

Regardless of your type of partnership, before going into business, you should agree on how your run the business together. There are some considerations.

Once you’ve done this, you should record your arrangements in writing in a partnership agreement.

Partnership law tends to date from many years ago. How modern business is operated differs very much from how businesses were operated when the law came into place. Without a partnership agreement in place you might find that the default rules that apply to parts of your business date from over a hundred years ago.

Important things to work out before you start your business include:

  • the percentage ownership of each partner

  • who contributes what into the partnership, and whether those assets belong to the partnership or not if the business is later sold or wound up

  • how profits and losses will be allocated

  • how decisions will be made at meetings, and possibly whether any partner has a casting vote or more say on a particular matter

  • the principal duties of each partner

  • the limits of authority of each partner who makes decisions by himself or herself, for example you might agree that no partner can borrow or make an order for more than £500 without the agreement of the others.

  • the procedure for admitting a new partner

  • the procedure for removing partner from the partnership, or what happens when a partner decides to leave

Setting up an ordinary partnership

You should decide whether you want to trade under a business name, and what that name should be. There are rules on what name you can choose.

An ordinary partnership does not have to be registered with Companies House. The way you decide to run your business remains private between you and your partners.

You should choose a nominated partner. This person must register the partnership with HMRC. He or she becomes responsible for keeping the business records and filing tax returns.

All partners should register for self-assessment with HMRC.

Setting up a limited liability partnership (LLP)

You must choose to designated partners. These people have additional legal responsibility, for example to file accounts at Companies House, and keep business records.

You will need to agree a name for your business.

Just as an ordinary partnership, you will need to agree how your LLP will operate. Because an LLP is different from an ordinary partnership, your partnership agreement needs to be one for a limited liability partnership.

An LLP is registered at Companies House. Therefore, you need to complete Form LL IN01 - an “application to register a limited liability partnership”. The form should be sent with the relevant fee to the Registrar.

You can also complete the form and pay online using electronic software filing.

Once companies house approves your registration, they issue a certificate of incorporation.

Setting up a limited partnership (LP)

A limited partnership structure has two types of partners. General partners have no limited liability. Limited partners do. Therefore, you need to decide which partner or partners will be general.

Sometimes a limited company is chosen to be the general partner. The advantage here is that while the company has unlimited liability as a partner, as a company the liability of its shareholders is limited. However, for small businesses this structure may involve more administration than the value of the extra protection.

Just as for other types of partnership, you should choose a business name and agree terms within a written LP agreement.

Like an LLP, a limited partnership is registered at Companies House. You do this by filling out Form LP5.

Each partner must separately register for self-assessment with HMRC.

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