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Partners and Sole Traders

A partnership is legally defined in the Partnership Act 1890 as “the relation which subsists between persons carrying on a business in common with a view of profit.”

There are two types of partnerships in the UK:

1. An unincorporated partnership
2. A Limited Liability partnership (LLP)

Limited Liability Partnership

The main difference is that the members of an LLP have a reduced personal responsibility for the business debts. However, this excludes personally guaranteed loans etc. A partner in a normal / unincorporated partnership is liable for the business debts. This applies even if the debts resulted from negligence by other partners. For example, if a business partners error of judgement resulted in the loss of your home.

However, the offer of limited liability comes at a price. This is because an LLP must file accounts with Companies House which are therefore accessible by the public. A normal partnership does not need to file accounts with any government body.

The partners or members are taxed on their share of the profits, rather than the amounts drawn from the business. There may be opportunities to save tax depending upon the choice of year end and future profit projections.

Binding

Under both routes, a partner of the business could bind the firm without the consent of the other partners. It is therefore important that there is confidence in the skills and integrity of the other partners before proceeding down this route. Although issues in respect of consent could be included within a partnership agreement (see below).

Registration

In terms of registration, both have the same registration procedures with HM Revenue & Customs. However, as an LLP is an incorporated body, it will need to also be registered with Companies House. Resultantly, this proves more costly in terms of set up costs.

Partnership Agreement

We recommend that you establish a partnership agreement from the outset. This is regardless of whether you decide to operate as either an un-incorporated partnership or an LLP. This will detail how disputes are resolved, retirement issues, death, allocation of profits, consent etc.

Please call us today if you are considering setting up a partnership. We would be happy to discuss these matters in more depth.

Tax and National Insurance

For tax purposes, there are no differences between the two entities. Under both types, the partners (or members as they are known in a LLP) pay tax and national insurance on their allocated share of the profits, as if they were sole traders.

Both an LLP and a normal / unincorporated partnership are required to prepare a partnership tax return to submit details of the profits / losses to HM Revenue & Customs. No tax is payable by the partnership. This is because the profits are shared between the partners / members who declare the profits and pay the tax via their own individual tax returns.

If there are losses in the early years of the business, there are opportunities to relieve these losses against income prior to the partnership start date. There are also potential opportunities to save national insurance depending if you were employed before you began in partnership.

Sole Traders

A sole trader is the simplest form of a business. The sole trader is the person in charge of the business. The sole trader will make all of the business decisions but is liable for all of the business debts.

This potentially means that the individual’s personal assets could be at risk from business debts.

Accounts

The business will need to prepare accounts for tax purposes only. There is no requirement to submit the accounts to any Government body. Instead, the accounts figures on the sole traders tax return can be included. This is in addition to any other income received or reliefs due.

As a Sole Trader you are taxed on the profits of the business. This is regardless of the monies taken from the business. E.g. the profits may be £25,000 but you may have only taken £12,000 in drawings from the business. You would be taxed on £25,000.

Tax and national insurance

You will pay income tax and national insurance based on your tax adjusted profits.

If there are losses in the early years of the business, there are opportunities to relieve these losses against other income prior to the start date. There is also potential to save national insurance costs. This depends on whether you were employed before you started your business.

We would be delighted to discuss your affairs with you and expand on the points above.

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