Partnership
Partnership: Characteristics
- A partnership is a business shared between two or more people, known as partners.
- Partners share the business’s profits and losses proportionally according to their agreed share.
- Each partner has joint and several liabilities, meaning they’re all responsible for the business debts.
- Partnerships are governed by a legal document called the Partnership Agreement, which outlines the responsibilities and benefits of each partner.
- Although not legally required, this agreement is crucial to prevent future disputes.
- The business’s identity is separate from its partners, but the business does not have a separate legal entity like a corporation.
Partnership: Advantages
- Partnerships have more potential for financial resources as there are more owners contributing capital.
- The risk of running the business is shared among the partners, decreasing individual liability.
- Each partner brings a unique skill set and knowledge base, allowing the business to be more versatile.
- Decision-making is shared, decreasing the burden on one individual.
- Greater support and camaraderie can foster innovation and creativity in the business.
Partnership: Disadvantages
- Partners are liable for the actions of other partners; if a partner makes a decision that leads to loss, all partners share the liability (joint and several liability).
- Potential for conflict and disagreement on decisions due to more than one owner.
- Some partners may not contribute as much effort, leading to tension (imbalance of workload).
- The partnership is dissolved if a partner leaves, unlike a corporation which can continue operating.
Partnership: Responsibilities
- Partners must register their business with HM Revenue and Customs (HMRC).
- The partners must keep accurate financial records, declare their shared income, and submit a partnership self-assessment tax return to HMRC.
- They are responsible for paying their own tax and National Insurance contributions based on their share of the profits.
- Depending on the turnover of the business, partnerships may have to register for VAT.