Your Essential Guide to Choosing Partnership Structure for New Business

business handshake

business handshake


One of the most important items anyone needs to take care of when starting a business is how to structure the business entity. It is even more challenging when you are starting a business with a partner. You will need to know about various types of partnerships and how to set them up.

Of course you need to have a name of the business ready before you can form a legal entity with that name. Trade names are usually protected as intellectual property, so make sure you’re not infringing on someone else’s property rights when you name your company. If you’re going into business with someone else, choose a nominated partner and register with HM Revenue and Customs (HMRC). The nominated partner is responsible for managing the partnerships tax returns and keeping records.

There are several ways to set up the business as a partnership as explained below.

Ordinary Business Partnership

Ordinary Business Partnership is the most basic type of partnership which is similar to a sole trader entity. When you set up an ordinary partnership, you are responsible for any losses your business make, bills for things you or your partner buys, and any and all taxes on income. The partnership will also have to register for VAT if you expect takings of more than £82,000 per year.

Limited Liability Partnerships

LLPs are incorporated entities that are run by 2 or more members. A member can be a company or a person. Each member pays tax on their share of any profits in the company. However, they are not personally liable for the debts of the business.

To form this type of company, you will need to designate at least two members, have a registered address which is publicly available, make an LLP agreement, and register with the Companies House.

Limited Partnerships

A limited partnership or LP has at least one general partner and one limited partner. These legal entities allow for both legal entities and persons to serve as partners, but you must have a registered address, appoint at least 2 partners, and register with the Companies House. All partners pay tax on their share o the profits and, like an LLP, liability for business debts is limited.

Dissolving the Business

No one likes to think it will happen to their company, but many businesses eventually dissolve. If your partner leaves you with a pile of debt, you may be forced to use a company like Claims Direct to recover the funds.

If you leave your partner, but you don’t pay off your share of the debts, your partner may pursue you for payment. In either case, both of you are equally responsible for the business. You must file dissolution documents to formally end the company.

If you decide to sell your business, consider business brokers such as businessbrokersnj.com for you, your partners, and your company.

Any taxes that are due must be paid in the year that they are earned, regardless of whether the business operates for the full year or not. So, for example, if you earned money this year, but you dissolved the business before December, you must still pay tax on any shared profits you generated from business activities during the year. If you do not, the government may pursue you for payment of those debts.

Aaron Bishop is a business consultant. He likes sharing his business insights on the web. His articles can be found on business websites.