The Partnership Act 1890 defines a General Partnership, otherwise commonly known as an Ordinary Partnership or Business Partnership, as two or more individuals ‘carrying on a business in common with a view of profit’.
The provisions of this legislation provide guidance on how the partnership operates, and in the absence of a partnership agreement containing provisions to the contrary, means that:
• Partners have equal rights and responsibilities relating to the management of the business
• Partners are entitled to an equal share of the profits and are liable to losses, regardless of the capital they have contributed
• Most decisions are made under a majority vote
• Important decisions that affect strategic direction of the business, introducing a new partner and other fundamental matters requires the consent of all partners
This is one reason among many why all partnerships should always have a written agreement, even if it is a partnership with members who are all in the same family.
PRO’S TO SETTING UP A GENERAL PARTNERSHIP
General Partnerships do not need to be registered at
Companies House and subsequently make regular filings, which can makes things a lot simpler.
Profits made from the partnership are shared between the partners, and each partners is taxed individually on their shares of the profits, rather than the tax liability falling on the partnership itself.
CON’S TO SETTING UP A GENERAL PARTNERSHIP
A General Partnerships is not a legal entity, and this can come at a cost. General Partnerships cannot own property and other assets, make contracts with third-parties or grant security in its own right but can still file a law suit and be sued in the name of the firm.
Partners in a General Partnership are personally liable for debts accrued by the business and other obligations. Creditors can claim a partner’s personal assets as a means of recovering the partnership debts, even if that partner had nothing to do with the decision to incur the debt. This is under the legal principle that all partners have a joint and several liability for all partnership debts.
The personal liability of a General Partnership can be daunting, which is why many people look towards setting up their business as a limited company or a limited liability partnership.
SETTING UP A GENERAL PARTNERSHIP
Starting a General Partnership is quite straight forward. Firstly, one of the partners will need to be designated as the ‘nominated partner’. The nominated partner will be responsible for registering the partnership and the ongoing record keeping and reporting requirements.
To start, the nominated partner should consider the following:
• The name of the partnership (also consider the rules around naming a business as these will still apply)
• Does the partnership require permission from a local authority, a licence, sector regulator or professional body
• Registering the partnership with HMRC
• Individual partners will need to register with HMRC to submit their own income tax returns
• Premises, IT, and other equipment to run the business. These are owned by individual partners, not the business itself
• Setting up the appropriate banking arrangements and bookkeeping
• Registering the business for VAT should the business’s turnover exceed £85,000 per year or should the partners agree to register voluntarily
• Register for the Pay As You Earn (PAYE) payroll scheme should the business offer employment
• Obtain any mandatory business insurance and personal liability insurance or any other insurance the partners agree is suitable
Remember, there is no need to notify Companies House when setting up a General Partnership.
TAX LIABILITIES FOR GENERAL PARTNERSHIPS
A General Partnership is not itself liable to pay tax on its income. Instead, each individual partner is taxed on their share of the partnership’s profits and gains. Partners can normally claim relief for their share of a loss if one arises. What is not possible is for a situation to arise where some partners have taxable profits and some have taxable losses in the same tax year.
A partnership tax return is prepared each year and the profits are allocated within that return to the partners, who have to include their profit share as shown in the partnership tax return in their personal tax return, and pay tax and NI on it accordingly.
If the partnership’s income exceeds the VAT threshold of £85,000, or the partnership has voluntarily registered for VAT, then the partnership will be required submit their VAT returns to HMRC.
It’s important that partners make themselves aware of the coming tax changes that specifically impact General Partnerships. As of April 2025,
General Partnerships are set to join Making Tax Digital for Income Tax Self Assessment (MTD for ITSA).
If you’re thinking of setting up your own partnership, whether that be a General Partnership or a Limited Liability Partnership, the team at Moore (South) can guide you in the right direction. We often provide our clients with
Consultancy and Advisory Services on setting up a new business.
Contact us today to get started.