Maybe you have worked with a friend a number of times and both got on really well.
Or, you and a colleague have discussed starting a business together and you’re not sure what to do next.
Although there are a number of ways that you could work together, you need to seriously consider how this will work. It could be that there are more than 2 of you, maybe there are 4 or 5 – but you really feel you need to give this idea ‘a go’!
When discussing a business idea with more than 2 people, often Limited Companies are discussed, but there are alternative ideas which might be best to start with just to see how it all works out.
This could mean creating a ‘Partnership’. RIFT Accounting knows all about building winning Business Partnerships.
It could be that you wish to continue working under PAYE, but have another business with a friend - this could easily be set up as a Partnership.
Let’s look at how this could work?
If you've got 2 or more people working together in a simple business structure, then you've got a Partnership. Partnerships need to be registered with HMRC.
If you are PAYE and don't usually file a self assessment-tax return, then you will need to register as self employed, as any profit/loss from your percentage of the partnership would need to be recorded on your self-assessment.
A Partnership doesn't need to be just 2 people either, there could be numerous people.
However you decide to organise your Partnership, everyone involved needs to have a clearly understood, legally recognised stake in the business and any assets.
You may know each other well enough to work on good-will and handshakes, but an agreement still needs to be put in place between all partners. For example, if one Partner wants to leave the business or take it on a different course, you could have a potential problem without written terms in place.
The Partnership Act of 1890 is generally used to resolve these situations, but it gets tricky if you haven't established everyone's stakes beforehand. The percentages of ownership do not need to be equal – so although you could have a simple 50/50 split, you could also have 1 partner owning 50% and 2 others owning 20% and another owning just 10% for example.
Remember - You must register your partnership for self-assessment with HMRC if you're the 'nominated partner'. The nominated partner is responsible for submitting the partnership tax return. The other partners need to register separately. All partners also need to send their own self assessment tax returns as individuals.
Important things to consider include:
If you're a Partner in a business, you're personally liable for its debts.
- All Partners will need to declare themselves as self-employed and register with HMRC for Self Assessment. The Partnership itself will also need to be registered.
- You can be self employed as part of a partnership as well as being PAYE in another paid position – if you are not sure of your status and the best way to work, just let us know and we will talk you through it.
- An annual Partnership Tax return will need to be submitted to HMRC. There is always one Partner who is responsible for submitting the Partnership tax return to HMRC, they are called the ‘Nominated Partner’.
- The importance of keeping accurate and up-to-date records of all your business transactions is paramount, and we will assist you in selecting the most appropriate software.
- On completion of the Partnership tax return, any profits / losses will be transferred to the individual Partners tax returns depending on the percentage owned.
Another option could be Limited Liability Partnerships or Limited Partnerships, which have different rules from a Partnership.
Let’s take a look below at these options and how they work.
Limited Liability Partnership (LLP)
LLPs must register at Companies House and there should be an agreement stating what share of the profit each member should receive.
If you've got two or more people willing to commit to the business, you can set up as a Limited Liability Partnership. It's not restricted to people, it's possible for a company to be a Partner (or "Corporate Member") too.
Each member is entitled to a share of the business' profits. However, some or all of the Partners may have the amount of money they can personally lose limited. As long as you have two or more "Designated Members", who have more responsibilities, you can have any number of "Ordinary Members".
In effect, an LLP is half-way between a Partnership and a Limited Company. It's a little more flexible than the latter and a little safer than the former - but doesn't quite have all the benefits of either.
You really can't afford to ignore any of the responsibilities of setting up your business in this way. Designated Members can be prosecuted if they don't keep up with them, and the LLP can be taken off the register altogether.
The LLP will need to complete accounts annually.
Limited Partnerships (LP)
A Limited Partnership exists when 2 or more partners go into business together, but the Limited Partners are only liable up to the amount of their investment. An LP is defined as having Limited Partners and a General Partner, which has unlimited liability.
Again, a Partner can be a company. All Partners get a share of the profits, and pay tax on them as usual, but your other responsibilities depend on which type of partner you are.
Limited Partnership’s have to be registered with Companies House as well as registered with HMRC and must file all the necessary paperwork with the authorities.
Each of these scenarios are suggestions for how to set up your business partnership, all propositions are different and can be made up simply or can have a complex structure for the Partners.
The LP will need to complete accounts annually.