Creating a solid partnership
While the Covid-19 pandemic was bad news for many businesses, it did lead to an increase in people launching their own ventures for the first time. While many of us are happy to go it alone with a new business, some people grab the opportunity to do it with a friend, relative or colleague.
With the pandemic giving many people more leisure time, there are many businesses which have been established around a hobby or pastime. A partnership doesn’t actually need to be a full-time commitment, it could be that you launch a venture together on a part-time basis or alongside full-time jobs and it’s something you do in the evenings and/or at weekends, perhaps selling at craft shows or via an online shop.
If two (or more) of you are involved in the launch of a business and you don’t feel ready to become a limited company, then a partnership could be the way forward. Here at Lewis & Co, we support a number of these ventures in a variety of sectors, including fitness and dance.
A partnership doesn’t need to be split equally 50:50. This could be useful to consider if one of you has less time to commit. Perhaps you have a full-time job and your business partner doesn’t?
According to figures from the Federation of Small Businesses (FSB) the UK private sector business population was made up of 3.2 million sole proprietorships (56% of the total), 2 million actively trading companies (37%) and 384,000 ordinary partnerships (7%) in 2021.
From a purely business point of view, launching a business can be a lonely experience, so doing it alongside somebody else has a number of advantages. You’ll have somebody to discuss your plans with and share in the excitement and there’s also somebody by your side when there are challenges. You could both be bringing different skills to the partnership and, between you, your pool of contacts will be bigger. In addition, the capital you both bring to the business, as well as your ability to borrow, is also bigger.
A partnership can be easier to set up and can mean less paperwork than a limited company incorporation. Compared with a limited company where certain documents are made available to the public, partnerships have more privacy. This could mean though that, as a partnership’s financial information cannot be independently checked, some financial institutions may be less willing to lend money or provide as favourable lending terms as they would with a limited company.
As a partnership, you will have unlimited liability, which means you are liable for the debts of the partnership; your own share and all the debts including those of each partner.
With the partnership structure, each partner is taxed as an individual, as opposed to the partnership being taxed as a body distinct from its owners.
If you are a sole trader, your accounts will be used in your self-assessment tax return to calculate your tax liability. Partnerships work in a similar way, with each party of the partnership being required to declare their share of the income, profit or loss within their personal self-assessment tax returns. It’s worth noting that you can take advantage of the unused Personal Tax Allowances of each partner and therefore reduce overall tax liabilities.
While setting up a partnership with somebody else can seem like a good idea, it is sensible to set out the terms agreed by the partners in a formal ‘partnership agreement’. This is even more sensible if one party has a larger percentage than another. It isn’t a legal requirement but could make any disputes – or a breakdown of the partnership – easier to navigate. This can be a tricky conversation to have at the outset, when everyone is full of enthusiasm and energy, but it’s worth doing.
Here at Lewis & Co, we can help you with this as well as setting up and structuring your partnership. Do get in touch on tel: 01892 513515 or email info@lewisandco.biz