A partnership is where two or more sole traders work together.
Each partner needs to be registered as self employed with HM Revenue and Customs (HMRC) and complete their own personal tax returns.
The partnership needs to be registered in its own right with HM Revenue and Customs and complete it’s own tax return each year.
The partnership does not pay tax that filters down to the partners.
Each individual partner records their proportion of the partnership’s profit on their individual self assessment tax returns and pays tax accordingly in exactly the same was as if they were self employed. That means income tax and national insurance on any profit over a partner’s personal allowance.
A partnership is a good way of spreading the tax burden while working with people you trust.
The partnership is flexible, has the benefit of two or more heads, and the business won’t collapse if one of you is sick or needs a holiday.
It is very important that an agreement as to how the liabilities, ownership and profits of the business are split and what happens if one partner wants to leave is drawn up. This is called a partnership agreement.
In a standard partnership, as with sole traders, all partners are also responsible for all the debts owed by the business. This doesn’t only apply to debts you have incurred as a partner but to those of any partner, so you need to pay particular care to the conduct of the people you go into business with and ensure that partnership agreement is in place.