What is a partnership

Partnerships can be formed in several different ways and can offer an attractive alternative to setting up as a company or a sole trader.

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Defining a partnership

A partnership is the relationship of two or more 'partners' carrying out a business with a view to making a profit. You and your partners are responsible for running the business. You share profits between yourselves. You and your partners are personally responsible for paying the bills (apart from LLPs). Partnerships are not a separate legal entity (apart from LLPs).

A partner doesn't have to be an actual person, for example, a limited company counts as a legal person and can also be a partner in a partnership.

Types of partnership

Ordinary partnership - you and your partners personally and jointly share responsibility for the running of the business.

Limited partnership - liability for debts can fall to specific partners rather than shared equally (ie general partners as opposed to limited partners are responsible without limit for all debts and obligations of the firm).

Limited liability partnership (LLP) - this is more like a company where partners are not personally liable for debts and liabilities.

Benefits of partnership

There is a greater amount of flexibility in partnerships. It’s easier to raise more capital by bringing more people into the business. Partnership can be an excellent way of combining different skills and sharing experience to create a powerful business entity. You don’t have to pay corporation or capital gains tax. The costs of incorporating a company are avoided and there is less administration due to no requirements to file documents with Companies House (apart from LLPs).

Partnerships do not have to publish or audit their accounts which means that financial and other information can be kept private (apart from LLPs).

Disadvantages of partnership

You and your partners are personally responsible if the business makes a loss (apart from limited partners and in the case of LLPs). Your share of profit is taxed as income.

Any dispute which arises in a partnership can cause major problems to the effective running of a business or when it comes to ending the business.

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