Tax and existence of a partnership
A partnership may be deemed to exist if two persons trade together even if an actual partnership doesn't exist on paper. If so, a partnership tax return will need to be filed in addition to each partner's self assessment return.
A partnership will only be deemed to exist if the persons are classed as carrying out a trade (trading). Therefore a husband and wife renting out one investment property would not need to file a partnership return, although they might need to file a self assessment return.
Partners are taxed on a self employed basis, although partnerships may pay the owners a salary through PAYE. Usually though, the owners will simply take their share of profits and pay tax and self employed National Insurance Contributions (NICs) on their own share of the income. More information about tax for the self employed can be found here: Taxation of businesses - self employed
All partners have unlimited liability for partnership debts. This is the most common form of partnership.
A limited partnership is where the liability of one or more partners is limited to the amount of capital they have invested in the business. This might be useful if you want to go into partnership to share in the profits but do not wish to risk your personal assets. However, there must be at least one partner whose liability is unlimited and partners whose liability is limited must not take part in the management of the business.
A limited partnership must be registered at Companies House, but no further disclosure is required and no accounts need to be filed or audited.
Limited liability partnership
A limited liability partnership (LLP) is a type of legal entity that, despite its name, is not strictly a partnership. In an LLP, the business, rather than the individuals, has a legal liability to third parties, much like a limited company. However, there are provisions that will make a negligent 'member' (partner) personally liable. Each member must endorse an incorporation document containing details of the business and the members, to be filed at Companies House. An LLP gives:
- Protection from personal bankruptcy
- Protection from a rogue member if the others can prove the individual acted without the authority of the rest of the members
- The same tax advantages as trading as a partnership
Accounts must be filed at Companies House and an audit may be required unless the business is exempt.
When a partnership is formed, each partner injects capital into the partnership. Depending on the partnership agreement, partners could be entitled to receive interest on their share of capital injected.
If a partner loans money (different to injecting capital), the partner becomes a creditor in respect of the loan. If the partner charges interest on the loan, the interest is a business expense.
Partner leaves/joins the partnership
When a partner leaves, if the business continues, his share of the business assets must be quantified and transferred to him. It is unlikely that the total of partnership assets and liabilities is the true value, so assets and liabilities will need to be re-valued and goodwill taken into account.
When a partner joins a partnership, the same revaluation process will need to be followed and profits/losses quantified up to the date of the change.
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.