A partnership is a common way to run a business, as it involves multiple inputs and management options but still offers a great amount of control over operations.
A member can be a person or a company, known as a ‘corporate member’. So if you’d like to go into partnership with yourself, you could technically set up a limited company to join you.
Adding and removing partners is a relatively simple process, which is one reason why some business owners may prefer this to starting a Limited Company. Personal salaries are easier to acquire, you only have to deal with HMRC as opposed to Companies House, and they can be opened and closed a lot easier.
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A partnership is a business owned by two or more people and/or limited companies. The profits at the end of the year are shared between them, depending on the percentages each holds, and money can be taken at any time.
Unlike standalone limited companies, a partnership takes on much of the burden of sole traders. Partners are responsible for any debts and contracts and will be personally liable if the business gets into financial difficulties, even if it is the fault of only one member. This is different to an LLP, which can separate the entities.
There are four types of partner:
- A general partner
- Silent or sleeping partners
- Salaried partners
- Corporate/limited company partners
Taxes To Pay
Partnerships must file a tax return with HMRC stating the income and expenditure and resulting profit over the year, but they aren’t obliged to pay tax on the profits, as these are divided to the partners.
The owners will pay tax as if they are self-employed. A lot of the taxes which a partnership and the members must pay also apply to sole trader companies, such as:
- VAT: All companies which bring in over £85,000 per year must register for VAT, but some who take in less may benefit from enrolling anyway
- Income Tax: Because the company is not separate to the individuals, they must return a self-assessment form
- National Insurance: Each partner will have to pay Class 2 (a flat rate of £2.95 per week if your share of profits exceed £6,205 per annum), and Class 4 (based on the partners’ profits. Pay 9% if between £8,424 and £46,350 and 2% over £46,350)
How Accountants Can Help
Tax returns are treated the same as for a self-employed individual, but because they are based on company accounts, it may be slightly more complicated to work out. An accountant could assist with:
- Bookkeeping: Maintaining records and accounts is important. Your tax returns will be easier, you’ll know who owes what, and you’ll be able to monitor your business finances. Having everything organised in an online account could give multiple users access to the data for timely updates, and an accountant can provide you with the best for your business
- Accounts: A copy of the accounts must be submitted to HMRC for tax to be calculated, and this information must come from the bookkeeping records and all correct to avoid fines. Accountants can get this all in order for you
- Self-Assessments: Due to the nature of a partnership, at least two of these forms will need to be submitted, depending on how many partners there are. If one is wrong, chances are the other is too. An accountant could ensure everything adds up, so all of the returns are correct, or do the returns on your behalf
- Payroll: If your company partnership employs other individuals, or has salaried partners, there will have to be a payroll. This can get complicated, so may be best if taken care of by an outsourced professional or with the right online accounting software, which an accountant can recommend
- Tax Relief: Just as with those who are self-employed, relief can be claimed regarding allowable expenses, such as office supplies, clothing and travel. An accountant can help with what you can and can’t claim, and help you categorise it online
- Advice: From adding new partners to raise income and invest, to ensuring your business set up is fully efficient financially, an accountant could give you some help. For instance, they may suggest changing to a limited company with more protection if you’re earning over £40,000.
Can I Take Care Of Partnership Accounts Myself?
There is no legal obligation to have an accountant in place. Because of the nature of partnerships, where several people are working together, you may decide to periodically meet and sort it out yourselves, or appoint one particular member to take control. Some online software packages also allow multiple users to have access to the accounts 24/7 so updates are easier.
However, depending on the size of the partnership, the accounts could take a lot of time and become complicated. Plus, if there happens to be a mistake and you are investigated by HMRC and fined/penalised, every member will be responsible for that mistake and fine.
To save this risk, having an accountant on hand could reduce the likelihood of mistakes and take the pressure off the partners, reducing liability. It also is a great way of ensuring you don’t pay the wrong amount of taxes and can make your business partnership as efficient as possible.
Even if you manage the bookkeeping online, having an accountant you can call on at any time or who can double check the software’s sums could be beneficial.