A partnership is a simple way for two or more people to work together. There are two types of partnership:

  1. Ordinary partnership
  2. Limited liability partnership

This page introduces the key stages in setting up an ordinary partnership.

What are ordinary partnerships?

An ordinary partnership is an unincorporated business. This means that the business is not a separate legal entity and the partners are personally liable for the business debts.

Partners are jointly and severally liable so, if you’re in business with someone with no personal assets then you could also find yourself liable for their share of any business debts.

If one partner takes on a debt, all the partners are jointly liable for repayment of the debt. If one of the partners resigns, dies or goes bankrupt, the remaining partners will still be personally liable for any outstanding debts.

A partnership can continue even if one partner resigns or dies as long as there are at least two other existing partners left. If there is only one partner left, the partnership must be dissolved, however, the remaining partner can continue on the trade as a sole trader.

What you need to consider operating through a partnership

A partnership maybe a good operating vehicle for you if...

  • Your current or prospective clients don’t mind working with an unincorporated business
  • Your fees are not paid by a recruitment agency
  • Your activities are not likely to put your personal assets at risk
  • You protect your personal assets by taking out adequate insurance cover, for example Professional Indemnity in case of a lawsuit
  • You don’t want the responsibility of being a company director
  • You and your partners have compatible skills and a clear, shared vision
  • All of the partners have high levels of trust in each other
  • You have a partnership agreement professionally drawn up.

How do I set up an ordinary partnership?

Although it is not a legal obligation, partnerships should have a comprehensive member agreement in place and take legal or professional advice about the issues covered in the agreement.

As a member of a partnership you need to register as self-employed. The HMRC provide comprehensive guidance about all the stages involved in registering a partnership:

If you would prefer more support and guidance through this process you can appoint an accountant as your agent – they can advise you on the implications and handle the set-up process for you.

How partners are taxed

Partners in an ordinary partnership are classed as self-employed and taxed on their share of any profit made by the business and, therefore, each partner is personally responsible for ensuring they pay the correct amount of tax on time through their own tax returns.

How partners are paid

Extracting money from the business is straightforward if you’re an unincorporated business (i.e. you’re self-employed rather than a company). Any profit left over after tax can be drawn from the business account if you wish.

To calculate the taxable profit:

  • Add up your invoices (excluding VAT).
  • Add up all your legitimate business expenses (excluding VAT).
  • Subtract the expenses total from the invoice total – that’s your profit.

Set aside any money for tax and bills that you owe (plus VAT if applicable – see the section on VAT). Any money left over is yours.

Note: partners in a partnership are taxed on their share of the profit.

Useful resources and next stages

Starting Out