Kick off the new tax year with 50% off our Ltd company accountancy packages!

Knowledge from Crunch - love accounting

Which company structure is right for my business partnership?

Posted by Tom West on Aug 28th, 2018 | Running a business

Crunch - Business Partners Company Structure

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.

Setting up a limited company - learn how here!

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.

Make Self Assessment easy with this guide

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.

Need specialist advice?

Still confused and want to speak to someone who can help? Call us on 0333 311 8000 or book a consultation.

Crunch Formations can get your new business registered in minutes

50% off our ltd company packages for your first three months!

Kick off the new tax year with 50% off any of our limited company accountancy packages.

Join Crunch Chorus:
The free community for the self-employed

You'll get access to a range of benefits, such as invoice software, jargon-free business guides, great networking opportunities, discounts, plus much more

Useful tools and resources

Business guides

From understanding expenses to starting a limited company, we've a range of jargon-free business guides for you to download and keep.

Invoicing software and templates

Create, send and store sole trader invoices in a snap with our free invoice software. You can also download a selection of invoice templates for all business types.

Take-home pay calculator

Use our Take-Home Pay Calculator to work out your true earnings and see if you could save money with a different company set up.

Need help with your accountancy?

Join 11,000 clients who trust our advice, support, and leading accountancy software for their business. All the support and advice you need, wherever you need it. Speak to an expert today on 0333 311 0800 to find out more about our bespoke packages.

    Find out more