Partnerships & Sole Traders

A partnership is legally defined in the Partnership Act 1890 as “the relation which subsists between persons carrying on a business in common with a view of profit.”

There are two types of partnerships in the UK:

1. An unincorporated partnership
2. A limited liability partnership (LLP)

Limited Liability Partnership
The main difference is that the members of an LLP have a reduced personal responsibility for the business debts unless they have personally guaranteed loans etc.
A partner in a normal / unincorporated partnership is liable for the business debts, even if the debts were as a result of negligence by other partners. This means that an error of judgement by your business partner could result in the loss of your house, for example.

However, the offer of limited liability comes at a price as a LLP must file accounts with Companies House which are therefore accessible by the public. A normal partnership does not need to file accounts with any Government body.
The partners or members are taxed on their share of the profits, rather than the amounts drawn from the business. There may be opportunities to save tax depending upon the choice of year end and future profit projections.

Under both routes, a partner of the business could bind the firm without the consent of the other partners. It is therefore important that there is confidence in the skills and integrity of the other partners before you proceed down this route. Although issues in respect of consent could be included within a partnership agreement (see below).

In terms of registration, both have the same registration procedures with HM Revenue & Customs, although as a LLP is an incorporated body, it will need to also be registered with Companies House, which as a result proves more costly in terms of set up costs.

Partnership Agreement
Regardless of whether you choose to operate via an unincorporated partnership or a LLP, we would recommend that you establish a partnership agreement from the outset which will detail how disputes are resolved, retirement issues, death, allocation of profits, consent etc.

If you are considering setting up a partnership, please give us a call to discuss these matters in more depth.
Tony Luckett
Managing Partner

01325 349 700
Kevin Shotton

01325 349 700
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Tax & National Insurance

For tax purposes, there are no differences between the two entities as under both types, the partners (or members as they are known in a LLP) pay tax and national insurance on their allocated share of the profits, as if they were sole traders.

Both a LLP and a normal / unincorporated partnership are required to prepare a partnership tax return to submit details of the profits / losses to HM Revenue & Customs. No tax is payable by the partnership as the profits are shared between the partners / members who declare the profits and pay the tax via their own individuals tax returns.

If there are losses in the early years of the business, there are opportunities to relieve these losses against income prior to the partnership start date and there are also potential opportunities to save national insurance depending if you were employed before you began in partnership.


Sole Traders

A sole trader is the simplest form of a business. The sole trader is the person in charge of the business and will make all of the business decisions but is liable for all of the business debts.

This potentially means that the individual’s personal assets could be at risk from business debts.

The business will need to prepare accounts for tax purposes only. There is no requirement to submit the accounts to any Government body but simply include the accounts figures on the sole traders tax return along with any other income received or reliefs due.

As a Sole Trader you are taxed on the profits of the business, regardless of the monies taken from the business. E.G. the profits may be £25,000 but you may have only taken £12,000 in drawings from the business. You would be taxed on £25,000.

Tax and national insurance
You will pay income tax and national insurance based on your tax adjusted profits.

If there are losses in the early years of the business, there are opportunities to relieve these losses against other income prior to the start date and there are also potential to save national insurance depending if you were employed before you started in business.

We would be delighted to discuss your affairs with you and expand on the points above.

You may also be interested in :
Business Planning

Tax Matters

Management Accounts
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