Learning Objectives:

By the end of this lesson, you will be able to:

• Understand the key characteristics of an ordinary partnership.
• Know the tax and financial obligations that apply to each partner individually.
• Understand how management, control and liability are shared between partners.
• Know how to set up a partnership and notify HMRC.
• Weigh up the advantages and disadvantages of this structure.

What is a Partnership?

An ordinary partnership — also called a general partnership — is a formal way for two or more people (or companies) to come together and run a business without creating a separate company. It combines the simplicity of self-employment with the benefit of shared ownership and shared responsibility.

Key characteristics:

• Also known as an Ordinary Partnership.
• Can have two or more partners; a partner does not have to be an individual — it can be a company.
• Partners must designate a Nominated Partner to take the lead in communicating with HMRC.
• Regulated by HMRC.
• No governing document is required, but a formal partnership agreement between partners is strongly recommended.
• Must have a business bank account.
• No registration fee.

Nominated Partner

Partners must choose one person to act as the Nominated Partner. This person is responsible for:

• Notifying HMRC about the partnership arrangement.
• Filing the Partnership Tax Return each year.
• Acting as the main point of contact for HMRC.

Taxation

Each partner pays tax on their individual share of the partnership’s profits. The tax regime is the same as for a sole trader.

• Each partner must file their own annual Tax Return / Self-Assessment.
• Income tax is calculated at the same rates as for a sole trader: Personal Allowance, Basic Rate, Higher Rate, and Additional Rate.
• Each partner is also responsible for their own National Insurance contributions.
• The partnership must register for VAT once combined turnover reaches £85,000.

Management and Control

In an ordinary partnership, there is no legal separation between the business and its owners. All partners share responsibility.

• Partners personally share responsibility for all business debts, losses, liabilities, and legal actions.
• All partners are responsible for financing the business, either equally or on an agreed pro-rata basis.
• Profits must be shared equally or proportionally between partners, as agreed.
• The business is managed jointly by the partners.
• All partners are responsible for maintaining accurate records of all sales, income, and expenses.

Important: In an ordinary partnership, each partner can be held personally liable for the full amount of any business debt or legal claim — not just their own share. This is known as joint and several liability.

Partnership Agreement

Although not legally required, a written partnership agreement is strongly recommended. It should cover:

• How profits and losses are divided.
• What happens if a partner wishes to leave.
• How decisions are made and disputes resolved.
• What happens to the business if a partner passes away.

Note: a partnership ceases to exist if any partner decides to leave, unless the partnership agreement makes provision for this.

Setting Up a Partnership

• Agree on the terms of the partnership, including profit share, roles, and responsibilities.
• Draft a formal Partnership Agreement (strongly recommended).
• Designate a Nominated Partner to manage the HMRC relationship.
• Register the partnership with HMRC. Each partner must also register individually for Self-Assessment.
• Open a dedicated business bank account.
• No registration fee applies.

Advantages

• Low cost to set up.
• Easy to get started.
• Full control retained by the partners.
• Very little financial reporting required.
• Greater potential to raise finance than a sole trader.

Disadvantages

• Each partner has full personal liability for all business debts — not just their own share.
• Heavier tax burden compared to a private limited company.
• May not always be seen as credible by larger corporate clients.
• Can be complex to wind up if partners disagree.
• Ceases to exist when one partner leaves, unless the partnership agreement provides for this.

Reflection

Is a partnership right for your situation? Ask yourself: do you trust your intended partner(s) enough to share full financial liability? Have you discussed what would happen if one person wanted to leave? Would a limited company structure offer better protection for everyone involved?