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Your Partnership:
Setting up as a partnership

A partnership is formed when two or more people get together to run a business for profit. A company itself can be a member of a partnership. A partnership can have between two and twenty members, although certain professional partnerships, such as accountants or solicitors, can have more members.

Partnership law is largely governed by the Partnership Act 1890 and the Act applies to all partnerships, unless the partners expressly agree to something different. However, whilst partners are free to adopt whatever terms they want in respect of their relationship with each other, the Act lays down certain principles which cannot be overridden (such as obligations to third parties).

There is no legal requirement to have a written partnership agreement, but we recommend that you set out the terms in writing and get them signed. There are also advantages in involving a solicitor. (If you do not have a solicitor we can recommend one to you.) The agreement will set out clearly from the outset how you intend to make decisions on certain operational matters and may help you avoid or resolve any future misunderstandings or disputes.

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A new partnership should contact the local tax office to let them know the partnership exists. HM Revenue & Customs (HMRC) will send a partnership tax return, and the partnership should appoint one of its members (the 'nominated member') to be responsible for the completion of the return and to give information to the individual partners to assist in the preparation of their individual returns.

Each partner is also classed as being self employed so each partner also needs to notify HMRC when they commence self employment. The notification should be within 3 months of the end of the month in which they join the partnership, or they may be charged a £100 penalty. The notification is made either by completing Form CWF1 or by phoning the Self Employment Registration Helpline.

If you are a partner then, as a self employed person, you will pay income tax, class 2 and class 4 national insurance contributions (NIC). Income tax and class 4 NIC are based on your share of the profits, and are collected under the self assessment system.

By contrast, you need to start paying class 2 NIC as soon as you become self employed. Class 2 NIC is charged at a weekly flat rate and we recommend that you complete the direct debit mandate, which forms part of the form CWF1, so that this is taken from your bank account automatically each month.

If the partnership has any employees, it will need to register for a PAYE scheme.

The partnership must also register for VAT if its sales are sufficiently high or if it wants to register voluntarily.

For more information on tax matters, see the following sections.


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