How to set up a partnership.

Partnerships allow two or more people to structure their business operation without incorporating – partnerships are not legal entities and can’t own assets, meaning partners have unlimited liability for company debts.

What is a partnership?

Partnerships combine the profit-making activities of two or more people into one structure. Responsibilities for liabilities and administrative tasks are shared between partners, who also split profits generated by activity performed under the partnership umbrella. Unlike limited companies, partners have full liability for any debts incurred by the business so you could lose your home in the event of being unable to pay off debts.


Business requirements

  • Tax assessment – each partner will need to register as self-employed and submit an annual self-assessment personally. The partnership must also submit a tax return
  • Income tax – you need to pay income tax on all profits generated
  • National insurance – you need to pay national insurance on profits generated as a result of work done within the partnership
  • Display partner names – all names must be displayed at your business premises and on all invoices, receipts, websites and letters. Your business address must also be displayed at your premises
  • Name – all limited partnerships must include either ‘Limited Partnership’ or ‘LP’ after their names. Your name should not be too similar to another company’s name or be misleading
  • VAT – contact HMRC to register for VAT if you expect or start to turnover £70,000 a year or more
  • Dissolution – should a partner die or drop out the partnership must be dissolved immediately
  • Registration – if you set up a limited partnership (one or more general partners and one or more limited partners) you’ll need to register the partnership with Companies House


Types of partner

Partnerships can be made up of as many partners as you want; there are three main types of partner who have different rights and operational responsibilities.

  • General partners invest in the business and have full responsibility for debts, as well as a share of profits. They engage fully in the day-to-day running of the company. All partnerships must have at least one general partner
  • Limited partners invest in the business and are only responsible for the initial amount invested. They are not legally allowed to take part in day-to-day decision-making
  • Sleeping partners invest money in the business and draw from its profits but can’t be involved in the day-to-day decision making. They are fully liable for any company debt
  • Companies & LLPs can become partners in a partnership, although they will have additional tax and reporting obligations as required by law. If a partnership is made up of legal companies as partners, it must submit annual ‘partnership accounts’ to Companies House


Deed of partnership

Although setting up a partnership requires no legal paperwork, setting out the partnership terms is advisable to help prevent any disputes arising. This is done through a ‘deed of partnership,’ a binding document created by all partners setting out the way in which the partnership will be run, who does what, how much each partner is contributing financially and how the profits are distributed. Partnerships without this document are covered by the Partnership Act 1890 which provides very basic protection.