It can be exciting to go into business with a friend, colleague or family member. Sometimes combining different strengths, skill sets and areas of expertise can create a strong and successful business model. It is however important to understand how the structure of a partnership affects you as individuals.
A partnership can include 2 or more people and if you’re not going down the Limited Liability partnership (LLP) route then you are effectively operating as a sole trader (please refer to our sole trader information sheet), but only personally taxable for your share of the profits. Your personal self-assessment tax return would only include your share of the profits but a tax return for the partnership as whole must be submitted too.
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Because a standard partnership doesn’t provide Limited Liability, you and your partners are legally liable to pay any business debts, and each partner is ‘jointly and severally’ liable for the partnership debts as a whole. So, if Bill, Ben and Bob form a partnership and accrue debts of £3,000, but Bob can’t afford to pay his £1,000, then Bill and Ben will be held responsible to pay Bob’s portion of the debt too. When it comes to going into business with friends, family or colleagues, we strongly advise a clear and concise agreement of roles, responsibilities and shares up front. Ensure you have your structure set out in writing, so profits don’t become the cause of disputes and responsibilities don’t result in rows. It is best to plan and agree everything ahead of starting the partnership and have an official ‘partnership agreement’ drawn up by a solicitor. Knowing from the outset which goals you’re all working towards, who is responsible for which aspects of the business and how you’re all going to share the profits fairly is key to a successful partnership.
If you need any guidance around partnerships and accounting, get in touch.
By Michelle Morris on 05/10/2021 06:00:00