Partnerships are companies owned by two or more people. Partners share the risks, expenses, profits, and responsibilities that come with running a business. They are also unincorporated entities since the partners are self-employed. They are individually liable for any losses or obligations incurred by the company. Profit is distributed to partners as income, who then claim it on their tax returns. The business is not taxed separately on its earnings or losses, as corporations are.
- A potential partner may be able to bring capital into the company.
- They may also have more strategic connections than you. This could help your business in attracting new investors and raising further funds to grow it.
- It is not necessary to register the business to start a partnership business. Only the partners should come to an agreement.
- You have unlimited liability
- Each partner is accountable for the partnership’s debts. That is, each partner is liable for their share of the partnership debts
- Disagreements between partners could occur.
- Each partner is a representative of the partnership and is responsible for the conduct of the other partners
- Losing a partner can be expensive as you will have to value that individual’s assets and replace an important person who has taken on a lot of liability/responsibility.
How does it affect your taxes?
If you create a partnership to carry on a business, you must register it separately with HMRC. Each partner is individually taxed as if they were a self-employed business. As a result, instead of having tax taken from your profits at source, you must be prepared to receive a bill.
Since partnerships can be split however you see fit (according to your partnership agreement), everyone will have their percentage of the money you generate together.
An individual’s portion of partnership profits is taxed at the standard tax rates and bands similar to self-employment income (basic, higher and additional rates).
When should partnerships file tax return forms?
The date for filing your partnership tax return (SA800) is the same as the Self Assessment deadline. This is midnight on January 31st for digital submissions, and October 31st three months earlier for paper forms.
Remember that the first period you must report is from your start date to the 5th of April, so make sure you don’t miss the first submission.
This is the tax return for the preceding tax year. For the 2021/22 tax year, for example, you would file online by January 31, 2023.
If you miss that deadline, you will be fined £100 for each member of the partnership.