Your partnership:
Your business structure

Once you have decided to proceed with your business idea, you need to decide on which business structure to use. The most common ones are operating as a sole practitioner, partnership or limited liability partnership.

Your choice of structure is particularly significant for determining the way you will be taxed, your liability to outsiders and the information you must publicly disclose. You may not have an entirely free choice of structure. For example, partnerships (except for certain professional partnerships such as solicitors, accountants and surveyors) cannot have more than 20 members.

There are many issues to consider if you want to incorporate as a company or limited liability partnership. Contact us if you would like assistance with this decision.

Types of structure

Being a sole practitioner is the simplest way to run a business. You can make all the decisions yourself without reference to other partners, all the profits are yours and there are fewer rules to comply with than if you operated through a company.

You would form a partnership if you want to be self employed but also to work alongside other people. Each partner could then be involved in the decision making process, or you could have a 'sleeping' partner who just contributes financially to the partnership. Under the law of England and Wales, a partnership is not a separate legal entity.

A limited liability partnership (LLP) is a hybrid between a partnership and a company, which is particularly attractive to larger professional partnerships. In broad terms an LLP has limited liability and needs to register and file documents at Companies House like a limited company but is taxed under the partnership rules.

Tax implications

If you operate as a sole practitioner or are a partner in a partnership or limited liability partnership, you will be taxed as a self employed person. Your profits should be included on the self employment pages of your self assessment return.

You will need to pay income tax on the profits of the business, or your share of those profits, as well as Class 2 and Class 4 National Insurance contributions. You are taxed on the profit regardless of whether you have drawn that profit out of the business or not.

Partnerships and limited liability partnerships also need to make a partnership return to HM Revenue & Customs.

Related literature:

An introduction to self assessment

An introduction to the tax system for self employed

Corporation tax self assessment

Liability to outsiders

Your liability to outsiders for the debts or obligations of your business differs significantly depending on your business structure.

As a sole practitioner, you are personally responsible for any debts run up by your business.

In a partnership, each partner (even a sleeping partner) has 'joint and several' liability for the debts of the partnership. This means that any or all of the partners could be sued for the debts of the partnership. If a partner pays such a liability personally, he is entitled to claim a contribution from the other partners.

In a limited liability partnership the liability of the members is normally limited, but the firm itself, and any negligent members, will be liable to the full extent of their assets.

Public disclosures

Anyone dealing with a business will want to be sure that they know who they are dealing with, and for this reason there are rules on displaying business details that apply to all businesses.

Each LLP must be registered at Companies House, and this information is available to the public. The register includes information about the LLP itself, its members, partners, and the LLP is responsible for keeping this information up to date. Some changes need to be notified as they happen (such as the change of registered address) and others can be notified on the annual return.

Where a business has limited liability, those with a financial interest in the business, such as creditors, will want to know whether the business is financially sound. Consequently LLPs must prepare accounts in a prescribed format and in accordance with various standards and generally accepted accounting practice (GAAP), and if the LLP is large enough the accounts will need to be audited. All LLPs must file accounts at Companies House, but smaller LLPs need to file only abbreviated accounts.