A business partnership is where two (or more) people share the management and profits of a business. Once you’ve finished choosing a business partner or partners, it’s time to decide specifically which type of business partnership you’ll be entering into.
There are many different types of business partnership – each having different levels of financial liability for the partners involved.
Perhaps you’ll decide that you and your business partner want to form a limited company. For this, you’ll need to ensure you have a shareholders’ agreement.
This document is important and will ensure that should a company need to issue more or sell shares, the process is completed fairly. The shareholder agreement also stops shares being diluted and can allow for employees to become shareholders.
Two person limited company
A two person limited company is just that: a business formed by two people, who are both shareholders and (usually) directors of the business. The company must be registered and incorporated with Companies House.
An advantage of this type of company is that the shareholding is easy to manage and fairly simple to change.
For example, two friends – Sarah and Mark – form a limited company ‘Happy Happy Design School’. They both become directors of the company and have an equal shareholding.
The proportion of the business that Sarah and Mark have ownership of doesn’t affect their salary – Sarah and Mark are able to pay themselves an amount of salary based on their contribution to the business..
General Business Partnership
Let’s say that Sarah and Mark want to start a graphic design company. They choose to enter into a general business partnership and draw up a partnership agreement. Depending on the share profit agreement, both Sarah and Mark will be equally responsible for the running of the business. Both will be eligible to receive any profit the business makes and both are liable for any business debt.
The advantage of this general partnership is that both Sarah and Mark will both be classed as self-employed. For example, when drawing up their partnership agreement, they decide that Sarah owns 60% of the business and Mark 40%.
The graphic design company makes a profit in their first year of business of £100,000 – Sarah would take home £60,000 and Mark £40,000. Both would then have to complete a partnership tax return before filing their end of year Self Assessment, and both pay income tax and National Insurance.
There are, of course, disadvantages to a general business partnership. You are both liable for any debt the business incurs. What if Mark secretly runs up debt on a company credit card? Sarah would have to help pay the bill – as she is as responsible for the debt as Mark.
Limited liability partnership
A limited liability partnership (LLP) is similar to a general partnership. However, partners will have different liabilities. The partners in the business are liable for up to the amount they initially invested in the business.
If you’re a professional, for example an accountant, a doctor or a lawyer, then entering into an LLP might be the type of partnership for you.
Managed much like a general partnership, the partners in an LLP all have a say in the running of the business. Each partner has limited liability and there is no risk to personal assets.
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