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Unlock This CourseA partnership is when two or more people join together to run a business. Think of it like a team where everyone brings something different to the table - maybe one person has money to invest, another has brilliant ideas and someone else has the skills to make it all work. Partnerships are really common in the UK, especially for small businesses like accountants, solicitors, doctors and local shops.
Unlike sole traders who work alone, partnerships allow people to share the workload, costs and profits. But they also share the risks and responsibilities, which can be both good and bad depending on your partners!
Key Definitions:
In the UK, partnerships can have between 2 and 20 partners (though some professional partnerships like solicitors can have more). Partners don't have to put in equal amounts of money or work - it all depends on what they agree. Some might contribute cash, others might bring expertise, equipment, or even just their reputation to help the business succeed.
Partnerships have a fairly simple structure compared to big companies. There's no board of directors or shareholders - just the partners themselves making decisions together. However, the way they organise themselves can vary quite a bit depending on what they agree.
While partners can start a business with just a handshake, it's much smarter to have a proper partnership agreement. This legal document is like the rulebook for the partnership - it covers everything from how profits are shared to what happens if someone wants to leave.
How much each partner invests, how profits and losses are shared, who pays for what expenses and how much each partner can draw out as salary.
Who makes which decisions, whether all partners have equal say, who handles day-to-day operations and how disagreements are resolved.
What happens if a partner wants to leave, dies, or becomes unable to work. How is their share valued and paid out?
Not all partnerships are the same. The UK recognises several different types, each with their own rules and benefits.
This is the most common type of partnership. All partners have unlimited liability, which means they're all personally responsible for business debts. If the business owes £50,000 and can't pay, the creditors can come after the partners' personal assets like their homes and cars.
In a general partnership, all partners usually have the right to make decisions and represent the business. This can be great for sharing workload, but it can also cause problems if partners disagree or if one partner makes a bad decision that affects everyone.
Limited partnerships have two types of partners: general partners and limited partners. General partners run the business and have unlimited liability, just like in a general partnership. Limited partners are more like investors - they put money in but don't get involved in running the business and their liability is limited to what they invested.
This type of partnership is less common but can be useful when someone wants to invest in a business without taking on full responsibility for its debts.
Ben Cohen and Jerry Greenfield started their famous ice cream business as a partnership in 1978. They each invested $4,000 and took a $5 correspondence course on ice cream making! Their partnership worked because they had complementary skills - Ben was creative with flavours, while Jerry handled the business side. They shared profits equally and made decisions together. Their partnership structure allowed them to grow from a single shop to an international brand, though they eventually sold to Unilever in 2000.
Partnerships offer several benefits that make them attractive to many small business owners:
Partners can bring different strengths to the business. One might be great at sales, another at managing money and a third at the technical side. This means the business benefits from a wider range of skills than a sole trader could offer.
With multiple partners contributing money, equipment, or other resources, partnerships usually have more capital to start and grow the business than sole traders do.
Partnerships also offer shared workload and responsibility, which means partners can take holidays or handle personal emergencies without the business grinding to a halt. The business can also benefit from each partner's network of contacts and customers.
From a legal standpoint, partnerships are relatively easy and cheap to set up compared to limited companies. There's no need to register with Companies House or file annual returns, though partners do need to register for self-employment with HMRC.
However, partnerships also come with significant risks and challenges that potential partners need to consider carefully.
The biggest risk in most partnerships is unlimited liability. If your business partner makes a terrible decision that lands the partnership in debt, you could lose your house, car and savings to pay those debts - even if you had nothing to do with the decision!
This risk extends to all business activities. If a partner accidentally injures someone while working, or if they sign a contract that turns out to be disastrous, all partners are liable.
Partners don't always agree. Disagreements about business direction, spending, or work responsibilities can damage both the business and personal relationships.
All profits must be shared according to the partnership agreement. Even if one partner works harder, they might not earn more unless the agreement specifically allows for it.
If a partner leaves, dies, or becomes unable to work, the partnership legally ends. The business might continue, but it requires forming a new partnership.
While partnerships are simpler than companies, they still have legal obligations that partners must understand and follow.
Partnerships must register with HMRC within three months of starting business. Each partner is treated as self-employed for tax purposes and must complete a Self Assessment tax return each year. The partnership also files a separate partnership tax return.
Partners pay income tax on their share of profits, plus National Insurance contributions. Unlike employees, there's no PAYE system - partners are responsible for calculating and paying their own tax.
One of the UK's most famous partnerships is John Lewis, though it's actually a very different type called an "employee partnership." All 80,000+ employees are partners who share in the profits and have a say in how the business is run. They receive an annual bonus based on profits - in good years, this can be worth several thousand pounds per employee. This structure has helped John Lewis build a reputation for excellent customer service, as employees have a real stake in the business's success.
Successful partnerships don't happen by accident. They require careful planning, clear communication and mutual respect between partners.
The most successful partnerships start with partners who complement each other's skills and share similar values about how business should be conducted. They create detailed partnership agreements that cover potential problems before they arise and they communicate regularly about business performance and future plans.
It's also crucial that partners trust each other completely, since each partner's actions can affect everyone else in the partnership. Regular meetings, clear financial records and honest discussions about any concerns help maintain this trust.
Successful partnerships often have regular partner meetings, clear job descriptions for each partner, transparent financial reporting and procedures for resolving disputes. They also plan for the future by discussing what happens if the business grows, if new partners join, or if someone wants to retire.