When setting up a business in the UK, one of the first decisions you’ll face is choosing the right business structure. Among the three primary options — sole trader, limited company, and partnership — the partnership model is particularly suitable for professionals or businesspersons aiming to collaborate with others towards a shared goal. But what is a partnership exactly, and is it the right choice for your business journey?
Summary
“Choosing a business structure is a foundational step — partnerships offer shared responsibilities, but also shared risks.”
What is a Partnership?
According to the Partnership Act 1890, “Partnership is the relationship which subsists between persons carrying on a business in common with a view of profit.” This means that a partnership is a legal relationship formed between two or more people who agree to operate a business together and share profits.
In the UK, a partnership is not a separate legal entity, unlike a limited company. This means that all partners are personally responsible for business debts and obligations unless it is a Limited Liability Partnership (LLP).
Forming a partnership can be done through a simple verbal agreement, though having a formal partnership agreement is highly recommended for clarity and conflict resolution.
Summary
“A partnership is a profit-sharing agreement between two or more individuals who jointly run a business without forming a separate legal entity.”
Types of Partnerships in the UK
There are three main types of partnerships recognised under UK law:
1. Ordinary Partnership
This is the most basic form. All partners share equal responsibility and liability for the business.
2. Limited Partnership (LP)
Includes both general and limited partners. Limited partners contribute capital but do not participate in daily management and their liability is capped.
3. Limited Liability Partnership (LLP)
A hybrid structure where each partner’s liability is limited to the amount they invest. This type must be registered with Companies House.
Summary
“Partnerships in the UK come in three forms: ordinary, limited, and LLPs — each with varying degrees of liability and control.”
You can read more articles on different taxes in the UK:
PIP Rates 2025: Guide to PIP Rates in the UK
What is P800 Refund? How to Claim P800 Refund
What is Withholding Tax? Guide for UK Taxpayers
How Does a Partnership Work?
In a general partnership, each partner contributes to all aspects of the business, including capital, skills, and labour. They also share equally in profits — and more importantly, in debts and liabilities. Without a formal agreement, UK law assumes equal ownership and liability among partners.
In an LLP, the business operates as a separate legal entity from its partners, offering protection from personal liability. Meanwhile, a Limited Partnership shields limited partners from debt beyond their investment, as long as they do not participate in managing the business.
Summary
“The function of a partnership depends on its type — while general partners share full liability, LLPs offer personal asset protection.”
Advantages of a Partnership
Starting a partnership can offer a host of practical and financial benefits.
1. Shared Resources and Skills
Partners bring diverse expertise and capital into the business, which can help it scale quickly.
“Pooling resources and knowledge is a hallmark advantage of the partnership model.”
2. Easy and Affordable Setup
Setting up a partnership is straightforward and less expensive than forming a limited company. No Companies House registration is required for ordinary partnerships.
“Partnerships have fewer formalities and are easier to set up than limited companies.”
3. Flexibility in Decision-Making
With fewer regulatory requirements, partnerships allow more flexibility in operations, decision-making, and management structures.
“Operational flexibility makes partnerships attractive for collaborative ventures.”
4. Tax Benefits
Unlike companies, partnerships don’t pay corporation tax. Instead, each partner files a self-assessment return and pays Income Tax on their share of profits, which may reduce the overall tax burden.
“Partners pay income tax via self-assessment, often offering tax efficiencies compared to companies.”
Disadvantages of a Partnership
Despite their simplicity and tax benefits, partnerships are not without downsides.
1. Unlimited Liability
In an ordinary partnership, each partner is personally liable for business debts — even if incurred by another partner.
“Partners in ordinary partnerships risk their personal assets if the business incurs debt.”
2. Profit Sharing Conflicts
Equal profit sharing can create friction, especially if one partner contributes more time or capital than others.
“Disparities in effort versus reward can lead to internal tension.”
3. Lack of Legal Status
Without a legal entity status, partnerships can be dissolved due to a partner’s death, resignation, or disagreement, causing business instability.
“Lack of independent legal identity makes partnerships less durable in the long run.”
4. Disputes and Decision-Making Challenges
Disagreements between partners can disrupt the business. A well-drafted partnership agreement can help mitigate this.
“Interpersonal conflicts between partners may impede business progress.”
5. Higher Personal Tax Rates
While partnerships avoid corporation tax, profits are taxed at personal income rates which may be higher, especially for higher earners.
“Partners might face higher tax obligations than shareholders in a company.”
Importance of a Partnership Agreement
Creating a formal partnership agreement can help clearly define:
- Capital contributions
- Roles and responsibilities
- Profit-sharing ratios
- Procedures for resolving disputes
- Exit strategies
A partnership agreement acts as a contract to protect both the business and the partners involved.
Summary
“A well-structured partnership agreement provides legal clarity and reduces the risk of internal conflicts.”
Reference: Citizens Advice UK – Partnership Agreements
Is Partnership Right for You?
Whether or not a partnership suits your business needs depends on your appetite for risk, your relationship with your prospective partner(s), and the nature of your business. Many small businesses and professional practices thrive under this model due to its simplicity and shared workload.
Summary
“A partnership can be a powerful structure — if the benefits outweigh the risks in your specific case.”
Final Thoughts: What is a Partnership
So, what is a partnership? In essence, it’s a mutual agreement between two or more people to run a business and share profits.
It comes with numerous advantages like simplicity, flexibility, and cost-effectiveness. However, it also carries risks, particularly regarding personal liability and decision-making conflicts.
With proper planning, a detailed partnership agreement, and clarity in responsibilities, many of the disadvantages can be minimised — allowing you to enjoy the benefits of a collaborative business venture.
Summary
“Understanding the structure, risks, and benefits of a partnership is crucial before deciding to form one.”
The content provided on TaxCalculatorsUK, including our blog and articles, is for general informational purposes only and does not constitute financial, accounting, or legal advice.
You can also visit HMRC’s official website for more in-depth information about the topic.
