Have you thought about setting up a partnership? maybe you’re still debating whether forming a partnership is the smartest decision you’ll ever make. Starting a company with multiple owners is likely to be more difficult than starting one with just one owner. In this article, we’ll consider if setting up a business limited liability partnership in the Uk is the best alternative. As well as how you can start a partnership that won’t end in conflict.
Setting Up a Business Partnership
A partnership is a business agreement linking two or more people for the sole benefit of the business. There is no legal distinction between a partnership and a corporation. In a business partnership’s partners are often self-employed individuals. A limited business, on the other hand, is completely suitable as one of the partners in a UK partnership. Setting up a partnership involves sharing personal responsibility for your firm. This includes losses, bills, and profits.
State laws govern partnerships, and a new partnership must register with the state.
Before you enter into a joint venture, there are a few things you should know.
You should investigate these potential partners before deciding who will join you in a partnership. Even if you’ve known someone since kindergarten, it’s a good idea to double-check that they’d make a good partner. For each potential partner, this means:
Checking each partner’s credit score. Run a credit check with one or more of the credit bureaus (Experian, Equifax, or TransUnion).
Examine the individual’s online presence. What social media platforms does this individual use? What kinds of photos or activities do they share? Is there anything you don’t want your clients or customers to know about?
Give each partner a personality test. A personality test such as the Meyers-Briggs Type Indicator can assist you in evaluating potential partners and interactions.
Make a decision about who you want to partner with.
It’s possible that you’ll be forming a partnership with one or more other business owners. You’ll have to make a number of decisions about these individuals’ positions, duties, and compensation.
Contributions from Partners
How much does it cost to be a part of this collaboration? When a new partner joins an existing partnership, that person usually contributes a certain amount of money to the partnership. You’ll need to figure out how much each initial partner must contribute, as well as how much new partners will contribute in the future.
Type of Partner
What kind of partners are you looking for in your venture? Are all partners the same, or do some have greater day-to-day responsibilities than others? There are numerous categories in partnership:
General partners are the ones who do the work and make the decisions, and they have limited liability for the partnership’s debts and responsibilities.
Limited partners who contribute but are not involved in day-to-day operations.
Some partners may wish to put up an equity (ownership) stake, while others may prefer to be salaried (paid as an employee) because they are doing management functions. Equity partners and salaried partners are the two categories of partners.
Shares of the Partners
What percentage of profits does each partner receive? The partnership’s profits are split among the partners based on their contributions, seniority, type, or a combination of these factors. Take 100% and split it evenly among all partners. A distributive share is an amount payable to each partner.
Of course, partners will share the partnership’s losses in the same proportion. This distribution is solely for tax purposes; the amount each partner withdraws from the partnership based on this proportion is entirely up to them. 6
Pick a type of partnership.
You should choose a partnership type based on the options you made above. There are a variety of options available. A general partnership has only one sort of partner, and all of them are involved in day-to-day decisions and have the same partnership share structure.
There are both general and limited partners in a limited partnership. All partners in a Limited Liability Partnership are protected from liability for typical partnership operations.
In your state, you may be able to choose from a variety of partnership kinds. Check with your state’s business division to learn what types of partnerships are possible at this time.
Choose a name for your partnership.
The name of your partnership will be determined by the sort of partnership you have. If you’re starting a limited liability partnership, for example, you’ll want to include this designation in your name. Some states have specific requirements for the names of various types of businesses, so now is the time to do some research before deciding on a name.
A business name is a crucial piece of information for your company, and changing it can be difficult — and costly — so make sure you’ve decided on a name. You can register your partnership name with your state if you aren’t going to Step Four right away. You do not need to register the business name separately if you are registering soon.
Register Your State-to-State Partnership
When you’ve gathered all of the information you’ll need for your partnership, visit the Secretary of State’s website and look for the business or companies section. This is the place where you register your company as a partnership. You will be able to complete this registration online in most states.
If your partnership intends to conduct business in more than one state, you must register with each state separately. The main state is completed first as a “domestic” partnership, followed by registration as a “foreign” partnership in other states.
Obtain an Employer Identification Number
After you’ve determined your company’s name, type, and location, you may apply for an employer identification number (EIN) from the IRS. Even if they don’t have employees, almost all firms require an EIN. The procedure of obtaining an EIN is straightforward, and you can apply for one online or over the phone and receive the number right away9.
Be wary of websites that offer fraudulent Employer ID Number applications. They guide you through the EIN application procedure before charging you to file. These applications are never charged by the IRS!
Create a Partnership Agreement
Don’t overlook this crucial phase in informing your alliance. All of the processes and choices that the partners have agreed to are spelt down on paper in a partnership agreement. It solves all of the “what if” scenarios that can arise during the course of a partnership’s life.
Obtaining Additional Registrations, Licenses, and Permits
Here’s a rundown of some of the other legal and regulatory tasks you’ll need to complete as your partnership gets off the ground:
If you’re selling taxable goods or services, you’ll need to register for sales taxes with your state’s taxing authority. Register for the EFTPS payment system to pay your federal taxes. If you have employees, you must register in order to pay employment taxes. You’ll need to register your fictitious name (also known as a DBA, or “doing business as”) with your city or county.
Finally, depending on the type of partnership you have, you may have to register with your locality in order to obtain business licences and permissions.
Using an Attorney to Aid in the Formation of a Partnership
It’s possible that you won’t require an attorney to complete your state registrations and obtain your EIN. Having an attorney assist you with the partnership agreement, on the other hand, is a sure yes. You might be able to complete the first draft yourself and then have it reviewed by an attorney. An attorney will assist you in ensuring that the agreement complies with the rules of your state and will help you avoid mistakes and missing portions that may later become issues.
Setting Up a Limited Liability Partnership
A limited liability partnership (LLP) is a sort of company structure popular among professionals who ordinarily operate as general partnerships, such as attorneys, surgeons, and architects, but who require limited liability for its members. The following are the main distinctions between an LLP and a limited company:
An LLP does not have directors, stockholders, or guarantors; instead, it has members, who are known as “partners.” An LLP must have at least two members to be registered, but there is no limit to the number of members that can be added.
Instead of the Companies Act 2006, LLPs are controlled by the Limited Liability Partnership Act 2000 and the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009.
LLPs are taxed as partnerships, which means they are exempt from Corporation Tax but are responsible for paying Income Tax and National Insurance on their individual profits.
Advantages of Forming a Limited Liability Partnership
- The revenues of an LLP are split among its members.
- The taxation technique for LLPs allows for greater tax transparency as well as the ability for members to remain independent for tax reasons.
- An LLP can have another corporation (referred to as a ‘corporate body’) as a member. Instead of income tax, and corporate members will be subject to Corporation Tax.
- Members of an LLP can be located anywhere in the globe; they are not required to be UK residents.
Creating a Limited Liability Company
For limited liability partnerships, 1st Formations offers a specific LLP Package. The following are the main aspects to remember regarding LLPs:
Companies House, the UK’s official Registrar of Companies, requires that they be registered.
They must have a minimum of two members, with at least two of those being ‘designated’ members who are responsible for ensuring that the company’s and its members’ legal obligations are met. For incorporation, they must have a registered office address. This must be a complete postal address (not a PO Box Number) in the same UK jurisdiction (country) as the LLP.
LLPs are required to provide information about their People with Significant Control (PSCs). The PSCs will, in most cases, be the members.
Designated members are responsible for informing HM Revenue & Customs (HMRC) of the LLP’s existence and filing a Partnership Tax Return each year in the UK. LLPs must be created with a profit motive in mind. Non-profit organisations should avoid this corporate structure.
Setting Up a Partnership In The UK
If you’re starting a business with a partner or partners and want to set up a partnership in the UK, you’ll need to designate a “nominated partner” who will be in charge of the partnership’s tax filings and records.
You should take the following actions to form a partnership in the UK:
- Choose a company name.
- You may not have to register your business name.
- On every official paper, you must provide the names of all partners as well as the business name.
- ‘Limited,’ ‘Ltd,’ ‘limited liability partnership,’ ‘LLP,’ ‘public limited company,’ or ‘plc’ should not be used in business names.
- Your business name should not be the same as a trademark that already exists.
- Select a nominated partner to be in charge of the partnership’s tax return and financial records.
- HM Revenue and Customs must be notified of the partnership (HMRC)
By the 5 October of your company’s second tax year, the nominated partner must register your partnership and themselves for Self-Assessment with HMRC (https://www.gov.uk/set-up-business-partnership/register-partnership-with-hmrc). For example, if you began your firm during the 2019/2020 tax year, you must register it with HMRC by the 5th of October.
Other company partners must register individually and file their own tax returns after the partnership has been registered, as they are regarded as self-employed.
To Register online
If you can’t register online, fill out forms SA400 for the partnership and SA401 for the partners.
Fill out the VAT registration form.
Despite the fact that you have registered your UK partnership, you will not be instantly registered for VAT (VAT). If your business’s turnover exceeds or is likely to exceed, the current VAT registration threshold of £85,000 (effective April 1, 2017), you must register for VAT.
You must charge VAT to all of your customers once you register for VAT, and you will be able to claim back the VAT you paid on work-related expenses.
Conculsion
In every business you decide to set up there will always be benefits and drawbacks. Always weigh your options before making a decision and follow the rules in setting up a partnership in the UK. Because partnerships could be more complicated than it seems, once you pick the right partners for your business venture and follow the guidelines you are definitely going to enjoy your partnership.
Frequently Asked Questions
How do I start a partnership business?
- You and your partners should have similar ideals
- Choose a partner that has skills that are complementary to your own.
- Have a history of working together
- Define the roles and duties of each partner.
- Choose the best business structure for you.
- Put it down on paper
- Be open and honest with one another.
Is a partnership easy to set up?
A partnership, as opposed to a corporation, is relatively easy to form and manage. There are no forms to file or formal agreements to draft, while we recommend that a partnership agreement should be in black and white form for future reference.
Every partnership should have a formal partnership agreement that outlines the business’s rules and regulations.
How much does it cost to set up a partnership?
The cost of a partnership agreement is determined by a number of factors, including the service requested, the number of partners involved, and the number of custom terms that must be included in the document. A project involving a partnership agreement costs on average $603.89.
