Operating a firm with two or more individuals or corporate members is known as a general partnership. There are numerous partnerships in a variety of industries, from the service sector to manufacturing to not-for-profits, just like there are in any other firm.

General partnerships are a little strange since, despite feeling like a limited company in terms of people working together for the same enterprise, the tax procedure is different.

In a limited corporation, directors typically get only a little salary with the remainder coming from dividend distributions. In a partnership, the tax declaration and payment procedures are more akin to those of a self-employed person. Alternatively put, using the Self-Assessment system.

They must pay class 2 and class 4 national insurance, just like self-employed sole traders. They may be a partner in a very large company, but they are taxed practically as if they were operating independently.

What is a general partnership?

When two or more individuals or organisations come together to conduct business, they form an ordinary or general partnership.

Do general partnerships need to be registered?

Because a general partnership does not register with Companies House, it differs from a limited corporation or a limited liability partnership (LLP). Instead, the partnership must be registered with HMRC by the nominated partner (the partner in charge of administration).

Who can be in a general partnership?

An unlimited number of individuals or organisations may participate as partners in a general partnership. To let HMRC know that they are a member of the business, each partner will need to register separately from the partnership.

A general partnership may have quiet or sleeping partners, who retain merely an investment interest but do not participate in the day-to-day management of the business, or general partners who actively participate in its daily operations.

Mixed member partnerships

A partnership may occasionally involve one or more partners who aren’t at all “natural,” despite the fact that the majority of partnerships are between real persons (often referred to as “natural people” in law).

A partnership may involve corporate entities, public organisations, charities, or not-for-profits for a variety of purposes.

Typically, these bodies will become involved with partnerships where they are aiming to achieve a common goal. For example:

• They may want to collaborate to complete a particular project.

• Public bodies such as local councils sometimes set up a partnership to help with shared services, such as procurement or service delivery.

• Sometimes lenders or grant-making organisations may want to become part of the management team if they advance funds to a partnership.

Be careful that certain people may be referred to as “partners” even though they aren’t actually part of the partnership. A “managing partner” may not have any voting privileges or a cut of the earnings, similar to how someone may be granted a job title as a sort of honorific or functional description.

Who pays tax in a partnership?

In a general partnership, the partners—rather than the partnership as a whole—pay tax on the profits. This does not imply that the partnership is exempt from filing a return with HMRC.

In the event that a partnership is formed, the partnership must notify HMRC using form SA401 and register for self-assessment using form SA400.

For HMRC to be able to see how much money has been produced, who the partners are, and what their share is, the partnership itself must file a Self-Assessment tax return. HMRC does not anticipate taxation based on this, though.

• If the partner is an individual, they will pay income tax and National Insurance on their share of the profits.

• Partners who are limited companies will include their share in their company accounts, and report it as part of their company tax return.

Capital Gains Tax in general partnerships

Partners should also be mindful of capital gains tax when disposing of assets. A partner may be subject to capital gains tax when they sell their interest in a partnership, just as a business owner may be when they sell their enterprise.

If the partnership adds a new member who pays a premium to join, capital gains tax may also be due.

Can you be in a partnership and still pay PAYE?

• Members of Limited Liability Partnerships can be classed as salaried members, drawing a monthly income, and paying tax and National Insurance just like a regular employee.

• The second is where a person is employed in one business, but is also a partner in a different business which is a partnership.

This is perfectly acceptable as long as it isn’t a way of reducing the amount of tax and NICs they must pay. In this case, the taxpayer would fill in a Self-Assessment return that includes both the employed and partnership sections.

Do I need a partnership agreement?

Although they are not required for general partnerships, having an agreement in writing beforehand is generally a good idea. It should specify who the partners are, how the profits will be split, who will be in charge of what, and how much influence they will have.

A partnership agreement will also specify how the partnership can be ended, what happens in the event of a death in the partnership, and what occurs in the event of a disagreement.

It is extremely recommended to set up a partnership agreement; otherwise, if something goes wrong, you can find yourself in trouble.