If you’re planning to set up a business in the UK with a friend, partner or other trusted person, the best business structure could be either a partnership or an LLP. Both options are examples of partnership-based business structures, ideal for people who want to share the risks, costs and profits of running a business together. However, there are a number of differences between the two types of company, so you need to consider your decision carefully.
What is a Partnership?
A partnership is a business where at least two people work together with the aim of making a profit, for example running a local shop. To form a partnership, at least two partners must formalise the arrangement by signing an agreement. This agreement is confidential and does not need to be registered with any authority.
It’s important to note that a partnership can only consist of individuals (not legal entities), which means that the partners must be registered as self-employed. A partnership is a personal business entity, which means it does not pay corporation tax. Profits are shared directly between the partners, so you only pay tax on the income you earn. The same tax thresholds apply as for self-employment.
A key aspect of a partnership is your level of liability. You have unlimited liability for the debts of the company, including your personal assets. In addition, this liability is joint and several, meaning that if your partner makes a debt, creditors can also claim repayment from you.
When is a Partnership a good option?
When you enter into a partnership, you must be aware that you will be responsible not only for your own actions, but also for those of your partner. That’s why this type of business is primarily for people who trust each other.
A partnership has very low registration costs and minimal accounting requirements, making it a good alternative to other business structures, especially if you’re planning to run a small business.
The Partnership form is often used by those in the construction industry (but in this situation you must remember to register with the CIS system).
How do you file taxes in a Partnership?
The process of declaring income in a partnership is relatively straightforward and similar to that required for self-employment. Partners are required to declare their income and business expenses to the relevant authorities and pay tax on their share of the profits. In practice, this involves submitting documents such as
- A partnership tax return – although you don’t pay corporation tax, you still need to declare your finances and tell HMRC how profits have been distributed.
- Self-Assessment tax returns – each partner files this document separately, declaring their share of the company’s income
What is an LLP?
A Limited Liability Partnership (LLP) is a partnership with limited liability. As the name suggests, it combines features of both a Partnership and a Limited Company.
As with a traditional limited company, your liability as a partner in an LLP is limited to the amount of your investment. On the other hand, an LLP has the tax transparency of a partnership.
This means that the income earned is attributed to you as a shareholder, so you don’t pay double tax – first corporation tax and then tax on dividends.
A distinctive feature of an LLP is the existence of nominee members. These members are responsible for ensuring that the company operates in accordance with the rules and act in a similar capacity to the secretary of an LTD company. Designated members are also responsible for filing returns with the authorities.
When might an LLP in the UK be a good option?
An LLP is a good business structure for those who have trusted partners and wish to operate internationally. Within an LLP structure you can do business worldwide.
You don’t have to be resident in the UK or even make profits in the UK. Because of the limited liability, this is a good option for businesses such as law firms, accountancy firms or auditors.
Tax and accounting obligations in an LLP
There are also certain obligations that come with running an LLP. Firstly, you must register the company at Companies House. The registration process is slightly more complicated than for a partnership.
Although an LLP does not pay corporation tax, you are still required to file annual accounts – this is the responsibility of the nominee member. These accounts are usually subject to audit by a chartered accountant.
In addition, each partner must complete a self-assessment tax return each year, regardless of whether they have UK residency status.
Partnership vs. LLP – which is the better business structure?
It’s difficult to give a definitive answer as to which option is better. It depends on your particular situation. However, there are some key differences between the two types of company:
- Setting up the company – while both a partnership and an LLP require an agreement to set up the company, and this agreement can remain confidential (it doesn’t need to be registered), setting up an LLP involves additional steps – filing a special form and registering the company with the authorities.
- Liability for debts – in a partnership you are liable for debts with all your assets, whereas in an LLP your liability is limited to the amount of your investment.
- Company members – in a Partnership, the partners must be self-employed individuals, while in an LLP, corporate entities can also be members
Professional accounting assistance
Choosing the right form of business can seem like a daunting challenge. Instead of reading through regulations and guides on the internet, you can seek professional help.
At our accountancy firm we can advise you on which type of company is best for you. We take into account factors such as tax, formalities, liability and the specific nature of your business. We can also take care of company registration, tax returns and document preparation, as well as CIS registration and filing.
By choosing professional help, you can be sure that you are running your business in the best possible way, without incurring unnecessary costs or liabilities. By letting us manage your accounts, you’ll also have more time to focus on what matters most – growing your business.
