Run a business partnership

Partnerships can be a very efficient way of running a business where more than one person is involved. However, various formalities should be followed to keep things running smoothly.

Partnerships give responsibility for running a business to several individuals. LLPs and limited partnerships provide alternative forms of partnerships to a general business partnership. Aside from choosing an appropriate name, nominated partners must be chosen to fulfil certain duties and partnership agreements can be used to provide formality. Partnership self-assessments need to be sent to HMRC every year, in addition to individual self-assessments. There is a certain process that must be followed in the event that the partnership is brought to an end and a Dissolution of partnership deed can be used to effect this.

If more than one person is founding a business, and setting up a limited company is not suitable, starting a business partnership may be the best option. If you decide to set up a partnership, you and your partners will be responsible for running the business and the profits and losses will be shared between yourselves.

An alternative to a regular partnership is a limited liability partnership (LLP). This is a separate legal structure but, instead of shareholders and directors, it has 'members' who both own and manage the LLP. Generally, partners in an LLP are only personally responsible for the debts and losses of the partnership to the amount of their initial investment. LLPs are most commonly used for professional services firms (eg solicitors, architects and accountants). For further information, read Types of partnerships.

A further option is to set up a limited partnership. This consists of 'general partners' and 'limited partners'. General partners can be personally liable for all the debts in the partnership whereas limited partners are only liable up to the amount they initially invest in the business.

In Scotland, you could consider a Scottish general partnership. In this model, each partner acts as an agent and binds the partnership. However, every partner has unlimited liability to creditors for all the partnership debts.

You could also set up a Scottish limited partnership (Scottish LP). This is a unique vehicle available only in Scotland. Partners are taxed on their share of partnership income and gains according to their profit-sharing ratios. Scottish LPs are commonly used in private equity and property investment fund structures.

For further information, read What is a partnership.

As with all businesses, the first thing to do when setting up a partnership is to choose a name. As a business partnership, you do not have to register a business name but you need to publicise a fixed point of contact so that people connect the business name with you in your capacity as a business partnership.

Aside from the name, you'll need to choose a 'nominated partner' who is responsible for administration and tax returns. They must register the partnership for self-assessment with HMRC and the other partners must register for self-assessment with HMRC. Registering later than 5th October in the second year of your business can incur a penalty.

To help put you on a firm legal footing, you may want to consider drawing up a Partnership agreement - or an LLP agreement. If you're considering setting up an LLP route, you'll need to incorporate and register the LLP with Companies House.

For further information, read Setting up a partnership.

Nominated partners are required to send a partnership self-assessment tax return every year and all partners must send a self-assessment tax return every year. All partners must pay National Insurance and income tax and, if you expect your turnover to be above the current VAT threshold, the partnership must register for VAT. You can see the current thresholds on the Government website.

In the case of LLPs, in addition to the tax returns, designated members must sign annual accounts and file these, together with annual returns, at Companies House. For further information, read Running a partnership.

When terminating a partnership, a notice of termination can be served by one or more partners - or an agreement can be reached. You can consider using a Dissolution of partnership deed, to properly wind up the partnership and divide any assets or liabilities - this also applies to LLPs and limited partnerships. Partners must also publicise the dissolution, by writing to any relevant parties such as customers and suppliers and advertising in the relevant Gazette.

For LLPs, the application must be made to the registrar to be struck off the register, which can usually be done in the absence of any insolvency issues. With limited partnerships, the rules are similar to ending an ordinary partnership but only general partners can decide to dissolve a limited partnership. For further information, read Ending a partnership.

Partnership agreement

A professionally written Partnership agreement helps to avoid potential conflict by providing a detailed and complete agreement of what is expected of the partners and how the business will be run. It covers matters such as who the partners are, their capital contributions, their rights and responsibilities, and what will happen if and when they decide to leave the partnership.

LLP agreement

Businesses that decide to go down the limited liability partnership route can ensure they are on a secure legal footing by using an LLP agreement that limits liability and sets clear rules for sharing power and profits. It deals with a range of issues to be agreed between LLP members such as incorporation, finances, ownership, contributions, profits and losses, decision-making, risk management and members leaving.

Confidentiality agreement

The partners in a partnership may want to use a Confidentiality agreement to ensure that any confidential information that is shared between the partners will remain confidential during the partnership. It may also be used when the business partners wish to engage with external people.

Dissolution of partnership deed

When it comes to ending a partnership, a Dissolution of partnership deed can help to ensure that it's effectively terminated. It outlines all the crucial details regarding the dissolution and winding-up of the company, including the date on which the partnership will cease trading, what the partners can and cannot do from the date of dissolution, the discharge of the partnership's liabilities and the retention of records.