A Partnership has a similar legal structure to a Sole Trader, apart from there are multiple people involved in the business. If between 2 and 20 people go into business, but do not incorporate as a limited company or limited liability partnership etc, their enterprise takes the form of a partnership.
A partnership does not have any limited liability and for it to take on any legal structuring, a partnership agreement must be in place.
Partnership Agreements state the particulars and arrangements of the business, for example, the following information may be included;
The Partners of the Business
The date from which the partnership commences
The Trading Name of the business
If the partnership is a fixed term arrangement; the duration of the partnership would be stated
Details of the partnerships’ capital and who is contributing it
Details of profit sharing
Arrangements for the partnerships’ bank account
Arrangements for the partnerships’ accountant
The roles of each partner, if they differ, e.g. one partner is in charge or Finance and another is in charge of Sales
Details of the working contribution from each partner (possibly in hours per week) and the holiday entitlement of a partner
Proceedures for admitting new partners
Notice needed to be given to end the partnership and proceedures for doing so
As a partner, you will still be self employed and therefore, you will need to inform HM Revenue & Customs of your situation so that your earnings can be taxed correctly. You should keep accounts for the business so that you can see how much each partner is contributing or entitled to.
Beneficially, a partnership does not have to file the same statutory paperwork as a limited company does, but in contrast, if the partnership is wound up, there may be conflict between partners over who gets what.
Partnerships can often be more attractive to investors as there are more people involved and there should, in theory, be a bigger initial investment from the partner, as opposed to a sole trader who has just one person’s capital and one person’s experience / knowledge.
Partnerships are primarily set up by accountants and solicitors to ensure that they receive the appropriate amount of income. An example to illustrate this would be;
Partner A and Partner B are accountants and each have their own clients, in year one; Partner A earns £100,000 and Partner B earns £200,000.
If the business were a partnership
Each partner agrees to contribute £10,000 to the business to cover costs.
Partner A would take £90,000 home and Partner B would take £190,000, in respect of their indivual earnings.
If the business were a Limited Company
The total income is £300,000 and the total expenditure is £20,000
Profit for sharing out through dividends would be £280,000. Both Partner A and Partner B would receive £140,000 if they have equal shareholding.
Therefore; if the partners want to receive an amount of income, dependant on their contribution to the business, a partnership may be better, unless they are prepared to enter into complicated company resolutions and didvidend payment agreements.