Mostly, when we talk about a “partnership” in the UK, we mean a general partnership. You might also see this type of business called an ordinary partnership or business partnership. A general partnership is very different from both a limited partnership and a limited liability partnership (which, to confuse matters, isn’t really a partnership at all). Special rules apply to partnerships in Scotland, which are outside the scope of this article.
A general partnership is defined by the Partnership Act 1890 as two or more people “trading in common with a view to profit”.
A general partnership provides a relatively simple way for two or more people to own and manage a business together, each contributing capital, skills and time – similar to way in which a single person can operate a business as a sole trader.
Each partner will share, to some extent, in day to day pursuit of the business purpose for which the partnership is created, even if they undertake different work or focus on different parts of the business.
Have you looked at the features of a limited company?
If you're comparing business structures, you should also be aware of the advantages that a limited company can provide.
After sole transfers, the ordinary partnership is historically the second most common business form in the UK. It’s most associated with professional services like doctors, accountants and solicitors. But it’s accessible to various types of business, so a husband and wife or two tradesmen looking to work together might choose to run their business as a partnership.
What are the advantages and disadvantages of a general partnership?
A general partnership has no separate legal existence distinct from the partners. Unlike a private limited company or limited liability partnership, it does not need to be registered at or make regular filings to Companies House, which can help keep things simple. The business’s profits are shared between the partners, with each taxed individually on their share of the profits and no separate tax liability falling on the partnership.
However, that simplicity comes at a cost. As it has no legal personality, the ordinary partnership cannot own property or other assets, make contracts with third parties or grant security in its own right (albeit ordinary partnerships can sue and be sued).
Like the sole trader model, in a general partnership the partners are personally liable for business debts and obligations. Creditors can claim a partner’s personal assets to meet any debts, so partners lack protection if the business fails. In a partnership, each partner is jointly and severally liable for debts – so each partner could end up being responsible for the whole of any debt, even if those debts were taken on by others in the partnership or a partner who leaves. That’ll be most risky if your ordinary partnership takes on debts and you’re in business with someone with few or no personal assets.
This personal liability can be a daunting prospect, and is one reason why many people consider setting up their business as a private limited company, or in some cases as a limited partnership or limited liability partnership.
We’ve written another article that looks in more detail at the advantages and disadvantages of a general partnership.
Who are the partners in a general partnership?
Most partners are individuals, looking to work together to pursue a business purpose. But a limited company or a limited liability partnership may also act as a partner in a partnership. While most partnerships consist of between two and four partners, there are ordinary partnerships with up to 20 partners.
Each individual partner is self-employed in respect of their work for the partnership. But there’s nothing to stop someone also being employed within another business, or acting as a partner for more than one partnership at the same time.
It’s usually possible for someone to be admitted as an additional partner after it has been established. Unless the partners have agreed otherwise (generally via a partnership agreement), the partnership will dissolve upon the resignation or death of a partner. If only one partner remains, the partnership must be dissolved, although the person who remains might choose to continue the trade as a sole trader.
Each partner has extensive authority as an agent of the general partnership. When one of the partners purports to act on behalf of the partnership, it will typically be bound by contracts they enter into, even if the other partners have not agreed them. At the same time, each partner has a common law duty to act in the utmost good faith and fairness towards other partners, to disclose relevant information to the other partners and to act towards the benefit of the partnership as a whole.
Starting a general partnership
It’s quite simple to start a general partnership.
Firstly, one of the partners needs to be designated as the nominated partner. That means they’ll be primarily responsible not only for registering the partnership but also a lot of the ongoing record keeping and reporting requirements.
Although not an altogether exhaustive list, you’ll need to consider the following when setting up a general partnership:
- The partnership will need a name (most of the rules about naming a business apply).
- For certain types of business, before getting started you may need permission from your local authority, sector regulator, professional body or other organisation.
- The nominated partner must register the partnership with HMRC for tax purposes.
- Each individual partner must register with HMRC as self-employed.
- Consider and put in place appropriate banking arrangements and financial record-keeping.
- Consider whether premises, tools or equipment are needed to run the business. As a partnership has no legal personality, it cannot own property in its own right. Therefore, individual partners will own property on the partnership’s behalf.
- Register for VAT if the business’s turnover in any 12 month period will exceed the mandatory registration threshold (or the partners agree to register voluntarily).
- If the partnership will employ people, you’ll need to register a Pay As You Earn (PAYE) payroll scheme as well as to consider employment contracts etc.
- Obtain any business insurance that’s mandatory or the partners agree is desirable.
There’s no need to notify Companies House when forming an ordinary partnership.
Running a general partnership
By default, the provisions of the Partnership Act 1890 will apply to how the partnership operates internally. That means:
- Partners have equal rights and responsibilities regarding management of the business;
- Each partner is entitled to an equal share of the partnership profits (and losses), regardless of the amount of capital they’ve contributed;
- Most decisions will be made on the basis of a simple majority of the partners; and
- Decisions affecting the nature of the business, to agree the introduction of a new partner or other fundamental matters will require unanimous consent among the partners
Typically, however, the partners will want to amend these default provisions to better fit how they want their own general partnership to work. The law allows these internal matters to be varied, which the partners will usually arrange via a partnership agreement.
Operationally, the nominated partner is primarily responsible for maintaining business records for the partnership. For example, that will include:
- Details of partnership income and expenditure
- Records of the share of profits and losses attributed to each partner
- VAT records (if the partnership is registered for VAT)
- PAYE records (if the business employs staff)
They’ll need to make reports and returns to HMRC on behalf of the general partnership on a regular basis, including:
- A partnership tax return, which details each partner’s share of profits (or losses) must be submitted each year
- Submit PAYE returns (if registered for PAYE) and/or VAT returns (if registered for VAT)
- Report certain material alterations to the partnership, including a change in the nominated partner or an update to the name or address of the partnership or an individual partner. Details of new partners also need to be reported if the partnership is VAT registered.
There’s no requirement to make returns to Companies House for an ordinary partnership.
For tax purposes, individual partners in a general partnership are self-employed in the same way as sole transfers. Rather than receiving a salary from which tax is deducted via PAYE, they will be subject to Self Assessment. Each partner will need to:
- Report their share of partnership profits (or losses) alongside other income via a Self Assessment tax return
- Pay income tax on their share of the profits
- Pay Class 2 and Class 4 National Insurance Contributions