The Positives and Negatives of setting up a Partnership

Last Updated: Mar 19, 2021
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Although business partnership’s are one of the most common ways to run a business in the UK today, anyone currently thinking about setting one up should be made aware of both the positives and negatives of forming this sort of business structure.

The three most popular ways of setting up a new business is by forming a limited company, creating a partnership, and as an individual sole trader. While there are many advantages to each business structure depending on your circumstances, with a partnership it is wise to put in place adequate protection against things going wrong.

The positives of a business partnership

A good business partnership will enable each person to go into business with someone else with complementary skills. This can mean you forge a strong partnership where each member brings their individual strengths, skills and knowledge to the table. You can create a business partnership without having to go through the formations process to form a limited company.

However, no matter what your plans are for your business for the long term, without an added layer of protection in place, you may end up having your plans curtailed or even derailed by the influences of others.

Having a solid business plan with a set of aims and objectives for the future path of your partnership should be your first step before starting out. You need each partner in your business to be on the same page and fully in agreement with your business plan even before day one.

Lets take a look at the advantages and disadvantages of a business partnership in more detail. This will help you to consider all aspects of setting up your partnership before you fully commit yourself.

Forming a Limited Partnership

You may have thought about setting up your partnership as a limited company. This is a more binding and official form of business partnership where you go through the company formations process and register your business as a limited partnership with Companies House and HMRC.

There are a lot of advantages to be had by forming an official limited partnership that you cannot get through setting up an unregistered business partnership. For one thing there are a number of legal obligations and formalities that you have to meet. While this may seem a little scary at first, the reality is that if you are 100% committed to making your partnership work, and you want to see the same commitment from your business partner(s), forming an LLP really helps to make things official.

This can give your business partners a formal commitment to the success and future growth of the business and helps all involved take their jobs more seriously. From an outside perspective, forming a limited partnership also gives your company more credence in the public eye. Your company will be seen as being more trustworthy and legitimate to your prospective customers. This can also help build a level of trust and confidence in your company from your peers should you wish to set up a B2B business.

The advantages of setting up a regular partnership

There are obvious advantages to setting up a regular business partnership without having to go through the formality of registering as a limited partnership. The lack of formality can be appealing to begin with, especially if you want to spend most of your time getting your business off the ground. Plus you always have the option of forming a limited partnership further down the line when you are more confident of your success.

Your business accounts can have a far simpler structure for starters. An unregistered partnership doesn’t have to complete and submit a Corporation Tax Return to HMRC, but it is still essential that you keep precise bookkeeping and accounting records. You will be required to submit a partnership tax return each year as well as individual self assessment tax returns for each partner within your business. You must declare all profits from your partnership as well as any other source of income on your self assessment form.

Because there is less official paperwork that needs to be completed for an unregistered partnership, your time will not be taken up with the extra administration involved with reporting to HMRC as well as Companies House. You will not need to complete a confirmation statement for example or keep a set of statutory books up to date and on public display.

A partnership can be drawn up either in writing or verbally between partners. The only piece of official procedure you would need to follow is to register yourself as self-employed with HMRC for self-assessment purposes. This can be easily done online.

An unregistered partnership can also be dissolved quite easily, giving each business partner the obligation to leave the business at any time, should they wish to. While the freedom and flexibility offered by an unregistered partnership may sound appealing, especially in the early days of a new business where you may be testing the water with a new idea, it does leave your business somewhat exposed to risk.

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The disadvantages of an unregistered partnership

The major downside of starting up an unregistered partnership is that you may start your business partnership based on a great idea and a mutual drive to create something new and make it a success, but without any formal partnership agreement in place, your business could implode as soon as you hit a problem.

Without an official partnership agreement in place, it can be difficult to have a company procedure about how to deal with conflicts and disagreements. Because each partner will not have to adhere to any agreed obligations, they are free to walk away at any time, often leaving the remaining partner(s) high and dry or struggling to fill the gap left by the exiting partner.

A partnership must also consider what procedure to follow in a worst-case-scenario, say for example a partner should die unexpectedly. These are all risks that need addressing and many unregistered partnerships enter into business simply unprepared for certain outcomes.

Also as an unregistered partnership, your business doesn’t have any separate legal identity. This means that should the worst happen and your business goes belly-up, all the partners will be fully liable to pay off any debts that have been run up by the business. This means that each partner will have to pay off creditors using their own personal money, which could mean selling your property and personal possessions to clear the debt.

This is why going through the formality of officially registering your partnership and forming an LLP can be the best way to ensure the future success of your business venture. The formations process makes you sit down and properly structure your business partnership and draw up solid plans and procedures to follow that can really cement your business and make it quite bullet-proof.

There could be nothing worse than to set up a successful working partnership and make great progress, only to find that in a few short months or years down the line you hit a brick wall that can pose a serious risk to your business and everything that you have worked so hard for.

Good reasons to register your partnership

Sharing the burden of a business partnership sounds so much better and more secure than going on your own as a sole trader, but should something occur further down the line that means a partner wants to leave, or simply walks away without warning after a falling out, you really need to be prepared. Exit strategies are much easier to manage under a registered partnership structure.

With a limited partnership structure, the ownership and day to day management of the business is split between partners as directors of the company, and each partner will have a drawn up plan of obligations and commitments towards the company. If you really have the best interests of the business in your heart, then why wouldn’t you want to set up a sound structure that will help to guarantee it’s long term success no matter what obstacles come your way.

Because registering your partnership means that your business will have it’s own legal identity in it’s own right, your own personal money, property and possessions are protected. Should the business fold for whatever reason, you will not need to use your own money to pay off any business debts owed.

Attracting investment

Don’t forget that as a registered partnership you can attract capital investment into your company through selling shares and inviting more partners to join. This can be a great boost to your business giving you the necessary funds to enable your business to grow and expand. You may wish to move to bigger commercial premises or develop new products or services. The extra capital investment can help you with your research and design projects as well as budgeting for future plans.

Securing your profits

It is great to see your business profits come rolling in. However, with an unregistered partnership, the incoming profits are usually shared equally between the partners and are reported through the partners individual tax returns.

Within a limited partnership set up, business profits are retained by the company until paid out. This means you can use the profits to pay salaries under PAYE and to pay dividends to shareholders. As the partners within a limited partnership are also the shareholders, this means you can pay yourself an annual salary as well as receive a dividend. There can be a great tax advantage to doing this that can save you a lot of money overall when you look at the big picture.

Further reading:

How many shares do I need to issue at time of company formation?

A guide to Limited Liability Partnerships (LLPs)

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