Should I Start or Join a Traditional Business Partnership?

Thinking of starting a business or trade?  Where do you start?

Do you know the differences between Self Employed Sole Traders, Partnerships and Limited Companies?  We will tackle all 4 options but let’s look at how you set up a business partnership.

See: Should I Go Self Employed? Should I Go Limited Partnership?  Should I Go Ltd Company? and S/E v Ltd Co.  Take Home Pay

Firstly, there are two types of business partnership:  Normal Partnership and Limited Liability Partnership (LLP).  In this video, we explore the standard, normal Partnership.

For the typical, old-style Partnership, think of this as being self-employed but working in common, with common business/trade goals with one of more other, likeminded self-employed people.  Each partner is self-employed because partners cannot ‘employ’ themselves.

Therefore, the pros and cons of self employment are the same for a partnership.

Points to Note As A Partner

• The business is you collectively with other partners  e.g.  Smith & Jones (Plumbers Merchants).
• Partnership income is the sum of total income generated by partnership trade and shared between partners (there is no separate legal entity such as a Limited Company).
• Expenses are also shared.
• All profits in your partnership name are shared between partners and you are each taxed personally as self employed.
• This means Self Employed National Insurance Contributions and Self Assessment Income Taxes with income tax rate tiers at 20%, 40% and 45% for each partner.
• All debts are shared equally meaning all partners are jointly and severally liable for them and your other personal assets e.g., private (non-business) money, investments, your home, your car are not protected from creditors.
• Each partner’s individual pension funds are protected from creditors unless you have drawn from it such a tax-free cash, flexible drawdown or an annuity.

Setting Up As A Partnership

• Usually, a Partnership Agreement will be drafted and signed by each partner.
• The partnership agreement sets out the objectives of the partnership:
• Its trade.
• Its rules.
• The partnership share/interests e.g., one partner may have invested 60% of the capital and another 40% or one partner may do 70% of the work and the other 30%.
• The ‘partnership share’ then dictates the partner’s share of the profit.
• Agreement usually includes what happens if a partner wants to leave, is ill or dies.
• It is advisable, but not always common for partners to also have partnership protection life insurance and a ‘cross option agreement’ meaning that if a partner dies, life insurance is paid to the surviving business partner(s) and they can they buy the deceased partner’s share/interest in the business from their loved ones meaning:
• The business can carry on trading without the deceased partner’s family/loved ones having to get involved.
• The deceased partner’s family/loved ones then have funds to offer them financial security.
• The Partnership must be registered with HMRC and each partner registered for Self Assessment and complete the self employed areas of the tax return.
• Your ‘Partnership share’ of profit (income less allowable expenses) is subject to income tax at 20%, 40% and 45% depending upon how much your partnership share is.
• Self-Employed National Insurance Contributions (NIC) are not an allowable business expense as you pay them personally to protect your state pension entitlement.
• Profits below £6,725 pa = There is no requirement to pay NIC, but you can pay Voluntary Class 2 NIC at £3.45 per week to get credits towards your state pension.
• Profits between £6,725 pa and £12,270 pa = There is no requirement to pay NIC, but you still get credits towards your state pension without having to pay you Voluntary Class 2 NIC of £3.45 per week.
• Profits over £12,270 = You pay Class 4 National Insurance Contributions, and you get credits towards your state pension.  Profits £12,570 - £50,270 = 6% NIC, Profits over £50,270 = 2% NIC.
• When making your self assessment returns, you pay your income taxes and well as any Class 2 or Class 4 NICs.
• Self Assessment Deadline for each tax year 6^th April to 5^th April is due by the following 31^st January after the tax year end.
• By 31^st January you pay you end of tax year balancing payment for the previous tax year plus …
• Your 1^st ‘Payment on Account for Tax’ for the next Tax Year (based upon 50% of the previous year’s tax liability).
• Your 2^nd Payment of Account for Tax’ for the next Tax Year is payable by 31^st July (again based upon 50% of the previous year’s tax liability).
• Your final Balancing Payment based upon taxes due on the next year’s profits less your two Payments on Account is due by the following 31^st January.

Pros and Cons of Partnership

• Easy to set up and easy to run but you are personally liable, so your home and private wealth is at risk.
• Working collectively or bringing different skills to a partnership may help the business to be stable, survive and grow faster than if each partner was trading on their own.
• Working collectively may mean each partner is more financially secure should they go on vacation, be unable to work due to illness or even death as there are others to keep the business trading in your absence.
• Making Tax Digital (MTD) for Income Tax and Self Assessment (ITSA) for the Self-Employed and Landlords is due to start in April 2026 where profits are over £50,000 pa and from April 2027 where profits are over £30,000 pa.  This means that tax quarterly returns will be required in the same way that limited

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