Why a Partnership Can Be the Perfect Middle Ground

For many business owners, the appropriate business structure for operating their business is often between operating as a sole trader or incorporating a limited company. However, there is a third business structure option that is frequently overlooked:

The ‘unincorporated partnership’

An unincorporated partnership business structure can offer many of the practical advantages of both structures. It provides flexibility, simplicity and tax planning opportunities without some of the administrative burdens that come with running a company, particularly where the legal risks of particular types of trading business are not high.

What is an Unincorporated Partnership?

An unincorporated partnership exists where two or more individuals carry on a business together with a view to making a profit. Each partner shares in the profits/losses and responsibilities of the business, although the precise arrangements can usually be tailored through a partnership agreement.

For family run businesses and professional practices in particular, partnerships remain a popular and effective business structure.

Greater Flexibility Than a Company

Unlike a limited company, where profits belong to the company until distributed, partnership profits are generally taxed directly on the partners, irrespective of the level of drawings extracted.

This provides significant flexibility. Partners can often agree how profits (or losses) are shared, allowing the structure to adapt as changing circumstances evolve. For example, partnership profit-sharing arrangements may be altered to reflect differing levels of contribution, investment or succession planning objectives.

In contrast, company profit extraction can be more restrictive. It may also require dividends to be paid according to specific level of shareholdings.

Simpler than Incorporation

An unincorporated partnership structure is typically less administratively burdensome than operating a business through a limited company structure.

There are no Companies House filing requirements, no corporation tax returns and generally fewer statutory obligations. Whilst partnerships still need to maintain accurate accounting records and submit annual self-assessment tax returns, the administrative burden is often lower than that faced by company directors.

For many smaller and growing businesses, this can reduce both costs and compliance obligations.

A Potential Route Around MTD for IT Complexity

Making Tax Digital for Income Tax (MTD for IT) is now a reality for many sole traders and landlords. This brings quarterly reporting requirements and increased record-keeping obligations.

Importantly, most general partnerships benefit from a later implementation date than sole traders. This has provided some businesses with additional time to prepare for the new regime and may reduce immediate compliance pressures.

Whilst MTD for IT will ultimately affect many partnerships as well, the differing implementation timetables can make a partnership an attractive option when reviewing business structures.

Succession and Family Tax Planning

Partnerships can also be useful for family businesses.

Introducing family members as partners may allow future growth in the business to accrue to the next generation. This can assist with succession planning and, in some circumstances, produce tax efficiencies when structured correctly.

As every family’s circumstances are different, professional advice should always be sought before making changes.

Is a Partnership Right for You?

A partnership can provide an attractive middle ground between the simplicity of a sole trader business and the formal structure offered by a limited company business structure. With flexible profit and loss sharing, reduced corporate administration and potential advantages in the transition to MTD for IT, it remains a valuable option for many business owners.

Get In Touch

Considering whether a partnership could benefit your business?

Our tax specialists can help you assess the available options and identify the most appropriate structure for your circumstances.

Contact your local Whitings LLP office today.

Disclaimer - All information in this post was correct at time of writing.