Setting up and registering a partnership

Article reference: UK-IA-COM17
Last updated: January 2009

Introduction

A partnership is simply two or more people who come together to form a business with the intention of making profit. All partners must be over the age of 18 to be legally bound by the partnership agreement. Individual partners must register as self-employed with HM Revenue & Customs.

It is also possible for companies to be members of a partnership, in which case they will have tax and reporting obligations on top of those of individual partners.

This article will be useful reading for anyone considering a partnership arrangement.

How many officers can a partnership have?

Forming a partnership allows two or more people to set up in business together, sharing profits, managing burdens and risks.

The rights and responsibilities of the partnership's officers

The officers of a partnership normally share in both the responsibilities of running the business and the profits or losses that it makes. However, their precise rights and responsibilities will depend on:

  • The type of partner they are;
  • What the partnership agreement or "deed of partnership" provides for.

Types of partner

There are two types of partner. Each has different rights and responsibilities.

General partners

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. 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 partnership must have at least one general partner.

Sleeping or dormant partners

Sleeping partners invest money in the business and share in its profits, but do not take part in running it. They too, are fully liable for the partnership's debts.

Companies

Companies can be officers of a partnership and have the same rights and responsibilities as other partners, but they also have some additional tax matters and reporting obligations. Partnerships whose officers are all companies have to prepare 'partnership accounts' and send these to Companies House or the Northern Ireland Companies Registry each year. The officers of these partnerships must attach a copy of these accounts to their own company accounts when they submit these to Companies House.

The partnership agreement

A deed of partnership, or partnership agreement is a legally binding agreement between the partners. It sets the terms of partnership, detailing how it will be run and the rights and duties of the partners.

It's not necessary to have a deed of partnership in order to set up a partnership, but it's a good idea, as it will help to avoid misunderstandings and disputes between partners in the future. If the partnership does not have a deed, it will be governed by the terms of the Partnership Act 1890 which does not offer solutions to many of the problems that can arise (exit strategies and dissolution for example) and may not suit the way that you and your partners want to work together.

Additionally, the deed will set out:

  • The amount of capital that each partner is to contribute to the business;
  • The way in which partners will share profits or losses, and whether any of the partners should be paid a salary;
  • Working arrangements, such as how much time each partner should contribute to the business, who does what management tasks and what type of decisions need collective agreement between the partners;
  • Changes to the partnership (how new partners can be appointed and what happens if a partner dies or wishes to leave the partnership).

Checklist: setting up a partnership

Here a quick checklist of things to do as you start:

  • Display all the partners' names at all your business premises together with the address to which official documents should be sent;
  • Display all the partners' names on your business website and stationery, including letters, invoices, receipts and cheques along with your principal place of business. If the partnership has more than 20 partners you need only display your principal place of business;
  • Register as self-employed with HM Revenue & Customs (HMRC). This must be done by each individual partner;
  • Contact HMRC to register your partnership's existence and register for VAT if you expect a turnover of more than £68,000 a year;
  • Many other legal and tax obligations.
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