You may decide to set up a business with one or more other self-employed individuals. Here, we look at how you can form a partnership, how your new joint venture will be taxed, and how to protect the partners in case things go wrong.
Setting up a partnership
In theory, all it takes to set up a partnership is for yourself and your new business partner – or partners – to agree to join forces.
However, the partners, and the partnership itself must all be registered to pay taxes via the annual Self Assessment process.
Partnerships do not need to be registered with Companies House, as this is not an incorporated type of business, like the limited company.
However, opting to form a simple partnership – rather than a registered, limited liability company – does mean that you’ll can be found personally liable if the business incurs claims, losses or spiralling debts.
For that reason, it’s a good idea to take some advice from a professional in order to work out which business structure is best for you.
In addition, you should think carefully about what sort of partner you want to be. A “sleeping partner” is someone who has injected cash into the business but isn’t involved in the management of the firm, for example, while a general partner is usually both an investor and a member of the firm’s management team.
How will taxes work?
Individual partners in a partnership get taxed through the standard self-employment process, known as Self Assessment.
You must be registered with HMRC in order to do this. The process is simple and can be done online.
Regardless of whether or not the individuals involved are already self-employed, the partnership itself must also be registered with HMRC (Form SA400).
Each partner in the arrangement will then pay tax equal to their share of the partnership’s profits. The method for working out taxable profits is much the same as the process for self-employed people and requires the deduction of losses from profits.
You can deduct individual expenses from the partnership’s overall tax bill, but you can’t make deductions after the profits have been allocated – even if only one partner incurred the cost.
If you have a VAT-taxable turnover of above £85,000 in this tax year, your partnership will be required to register for Value Added Tax (VAT). If it’s lower than this, then don’t worry – registration is optional.
What is a deed of partnership?
When you start a new business – it is an optimistic (and busy) time, so it’s hard to imagine things going wrong further down the line.
But as with all things in life, it’s best to be prepared. Setting up a deed of partnership gives you some cover for the future, protects your hard work, and means you’re less likely to lose out if things aren’t the same in the future.
By spelling out everything – such as who has invested what, what jobs each of you will fulfil and how disputes will be resolved – in advance, you can protect yourself in the event of changed circumstances further down the line.
If you don’t have a deed of partnership, the Partnership Act of 1890 could end up being used if there’s a problem. However, this won’t necessarily protect you, so it’s vital to make sure you’re covered before you even start out.