Even if they do separate work or focus on separate sections of the firm, each partner will share, to some level, in the day-to-day pursuit of the business purpose for which the partnership was formed.
What are the benefits and drawbacks of a general partnership?
A general partnership has no legal existence apart from its participants. It does not need to be registered at or make frequent filings to Companies House, unlike a private limited company or limited liability partnership, which can help keep things simple. The profits of the business are divided among the partners, who are each taxed separately on their portion of the profits, with no separate tax responsibility imposed on the partnership.
That simplicity, though, comes at a cost. The ordinary partnership, because it lacks legal personality, cannot hold property or other assets, enter into transactions with third parties, or offer security in its own right (albeit ordinary partnerships can sue and be sued).
A general partnership, like a sole proprietorship, holds the partners individually accountable for the company's debts and responsibilities. Creditors might seize a partner's personal assets to satisfy debts, leaving partners vulnerable if the business collapses. Any partner in a partnership is jointly and severally liable for debts, which means that each member could wind up being responsible for the entirety of any debt, even if those debts were assumed by others in the partnership or a member who leaves. This is especially perilous if your ordinary partnership incurs debts and you're doing business with someone who has few or no personal assets.
Personal liability can be a frightening concept, which is why many people contemplate incorporating their firm as a private limited company, or in some situations as a limited partnership or limited liability partnership.
Tax and general partnership
An ordinary partnership is not required to file returns with Companies House.
Individual partners in a general partnership are treated as self-employed for tax purposes in the same way that sole transfers are. They will be subject to Self Assessment rather than receiving a wage from which tax is deducted through PAYE. Each pair will be required to:
- use a Self Assessment tax return to report their share of partnership profits (or losses) along with other income;
- must pay income tax on their portion of the profits;
- pay National Insurance Contributions for Classes 2 and 4.
In terms of operations, the nominated partner is primarily responsible for the partnership's business records. For instance, this will include:
- income and expenditure information for the partnership;
- records of the profits and losses attributable to each partner;
- VAT documentation (if the partnership is registered for VAT);
- PAYE statements (if the business employs staff).
They will be required to submit frequent reports and returns to HMRC on behalf of the general partnership, including:
- each year, a partnership tax return detailing each partner's portion of earnings (or losses) must be filed;
- submit PAYE returns (if PAYE is registered) and/or VAT returns (if registered for VAT);
- report any major changes to the partnership, such as a change in the nominated partner or an update to the partnership's or an individual partner's name or address. If the partnership is VAT registered, information on new partners must also be supplied.
Remember that a general partnership is not the same as a limited partnership or a limited liability partnership (which, to further complicate matters, isn't really a partnership at all). Please contact Persona Finance [firstname.lastname@example.org] if you require business or accounting help for your company.