Six things to consider before starting your business partnership

A partnership is a business arrangement where two or more people carry on a business together with the aim of making a profit. There are three main types of partnerships – general partnerships, limited liability partnerships (LLPs), and limited partnerships (LPs). This blog focuses on the most common type of partnership, a general partnership (also known as an ordinary partnership). 

General partnerships are popular because they are a flexible way of operating a jointly owned business, with minimal filing and governance obligations. However, a downside of general partnerships is that, unlike companies, LLPs and LPs, they aren’t a separate legal entity. This means the partners of a general partnership will be personally liable for the partnership’s bills and debts (potentially putting their personal assets at risk) and will personally share and be taxed on any profits.  

We’ve set out below six things to consider before starting a general partnership, to minimise risk and ensure you meet your legal obligations. Before starting a partnership, you should also seek accounting and tax advice to make sure your business structure is the most efficient for your purpose. 

1. Make sure that a general partnership is the right vehicle for running your business  

General partnerships are commonly used for commercial businesses, due to the minimal set-up costs, flexibility, and the absence of any requirement to register and file information at Companies House. However, using a company or LLP offers better financial protection for you as they limit your liability if the business goes under. It’s important to be aware of the benefits and risks of different types of business structures before starting your business. 

It’s also important to avoid starting a general partnership by accident. Any business arrangement where two or more people carry on a business together can be a general partnership, even if you don’t give it a name, register it anywhere, or enter into any written agreement. For example, if you and a friend collaborate on a business idea without setting up a company or signing any paperwork, you may well have still set up a general partnership together.  

If you set up a general partnership inadvertently, you may face unintended consequences, including:

1. a range of default partnership laws governing your arrangement. For example, the law sets out how profits and losses should be shared and how partners should make decisions, unless you have a written agreement overruling these default laws. See below for further guidance on written partnership agreements; and
2. penalties for failing to register your partnership with HMRC and/or failing to file partnership tax returns.

Note that in contrast to general partnerships, LLPs and LPs can only be set up by registering with Companies House. Detailed guidance on LLPs and LPs is beyond the scope of Sparqa Legal’s service; if you require legal advice on these structures you can access a specialist lawyer in a few simple steps using our Ask a Lawyer service. 

2. Consider a written partnership agreement to set out everyone’s rights and entitlements

Although it’s not a legal requirement to have a written partnership agreement, it’s a good idea because it allows you and your partner/s to choose rules around how your partnership will be run. For example, a partnership agreement allows you to decide matters like:

• how new partners are appointed;
• how profits and losses will be shared;
• the partners’ duties and responsibilities;
• how partners may retire or be expelled from the partnership; and
• the obligations of the partners not to compete against the partnership.

If you don’t have a partnership agreement, a range of default partnership laws will apply which may not be desirable. For example, the law specifies that all partners must share profits and losses equally, no partners are entitled to remuneration from the partnership, partners can’t be expelled, and any partner can terminate the partnership by giving notice to the other partners. By using a written partnership agreement, you reduce the risk of disputes with your partners in future and you have  greater flexibility to run your partnership as you wish.

For a template partnership agreement you can adapt for use by your business, see Partnership agreement. This template agreement is a deed, which means it should be signed by all partners in the presence of a witness. 

3. Choose a name for your partnership 

When choosing your partnership’s name it must not:

• suggest your business has a connection with government or public authority without permission;
• contain a prohibited sensitive word;
• include the words ‘limited’, ‘Ltd’, ‘limited liability partnership’ or ‘LLP’  (unless limited liability applies to your partnership), ‘public limited company’ or ‘plc’;
• be offensive;
• be misleading about what your activities do in a way that is likely to cause harm to the public;
• infringe another person’s trade mark; or
• be too similar to the trading name or brand of another business.

You don’t need to register the name of your partnership at Companies House. However, if the name is an important part of your brand, you should consider registering your own trade mark and domain name in order to protect it.

4. Ensure you meet your legal obligations around displaying partners’ names

You must include the name of your partnership and partners on all of your business documents and correspondence. You must also keep a list of partners at the contact address set out in your documents and correspondence. 

5. Register with HMRC 

Both the partners of a general partnership and the partnership itself must register with HMRC. 

Registration is due before 5 October in the partnership’s second tax year. For example, if you start a partnership business in the 2022-2023 tax year, you will need to register the partnership with HMRC by 5 October 2023. Failing to register can lead to a fine or other penalties.

In most cases, you must register your partnership with HMRC for VAT and charge it on your goods or services if your turnover for the previous 12 months is more than £85,000, or if you believe your annual turnover will move past the £85,000 per annum threshold figure within the next 30 days. For further guidance on when and how to register for VAT, see VAT registration.

If you are in doubt about how these requirements apply to your partnership, you should speak to an accountant or tax adviser. Partnership tax advice is beyond the scope of the Sparqa Legal service.

6. Obtain any necessary business licences

Some business activities require you to get a licence before you start. There are usually penalties for operating without a licence if you need one, most commonly a fine, although more serious matters can result in a prison sentence. You can find more guidance on some common business activities that require licences in our Q&A. 

The content in this article is up to date at the date of publishing. The information provided is intended only for information purposes, and is not for the purpose of providing legal advice. Sparqa Legal’s Terms of Use apply. 

Marion Kennedy

Marion joined Sparqa Legal as a Senior Legal Editor in 2018. She previously worked as a corporate/commercial lawyer for five years at one of New Zealand’s leading law firms, Kensington Swan (now Dentons Kensington Swan), and as an in-house legal consultant for a UK tech company. Marion regularly writes for Sparqa’s blog, contributing across its commercial, IP and health and safety law content.