Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Corporation
  2. Franchising
  3. Limited company
  4. Sole trader
  5. Self Assessment

Partnership – What is a partnership?

A partnership is a business structure whereby two or more people share ownership; these partners share any profits, but also the costs, risks and responsibilities involved with the running of the business.

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In the UK, there are different kinds of partnerships: ‘general partnerships’, ‘limited partnerships’ and ‘limited liability partnerships’. For each kind of partnership, HMRC sets specific rules on how the business should be registered, and the extent to which partners are liable for the business’s debts and finances.

Bear in mind that a partner doesn’t have to be an actual person – for example, a limited company can also be a partner, as it counts as a ‘legal person’.

How do I start a partnership?

To set up a partnership, you must:

  • Choose and register a partnership name
  • Choose a nominated partner to be responsible for the partnership’s business records and tax returns
  • Register with HMRC.

When establishing a partnership, partners usually draw up a written agreement to outline their rights and responsibilities. This agreement may cover:

  • Each partner's specific responsibilities
  • How much capital each partner should contribute
  • How to distribute profits
  • How to add new partners
  • The leaving process for existing partners.

If a partnership doesn’t establish a formal written agreement, the Partnership Act 1890 will apply.

Taxes and partnerships

Businesses that are registered as partnerships do not pay income tax. Instead, partners pay tax based on their share of the profit.

Partners usually receive a percentage of profits depending upon how much they originally invested. Each partner must register for Self Assessment with HMRC and complete an annual tax return.

Partnerships with an annual VAT taxable turnover of £85,000 must also register for VAT. Businesses with a turnover under this threshold can choose whether or not to register.