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Partnership

If you are going into business with someone else in the sense of sharing profits rather than just employing them, you will be treated legally as carrying on a business in partnership.

Any two or more individuals who carry on business together with a view to making a profit are treated in law as carrying on a partnership and this type of business is called a “firm” (Partnership Act 1890 s.1). It is important to note that each partner is liable for all the debts of the firm. He or she is also liable for any debts made or wrong caused by any other partner in the “ordinary course of the business of the firm”. A firm does not have a legal personality separate from its partners although it can sue and be sued in the firm’s name. The partners of a firm do not have limited liability. The legal position in Scotland is different: a firm does have legal personality although not limited liability.

The law provides a default set of rules for a partnership; for example, capital and profits are shared equally unless otherwise agreed (Partnership Act 1890 s.24(1)), and one partner may dissolve the partnership at any time. These rules are quite basic and in order to avoid the default rules applying unexpectedly, and to ensure the partnership terms are suitable for your situation, it will therefore be advisable to obtain professional advice and adopt a partnership agreement.

Business name: as in the case of a sole trader, if the firm carries on business under a name other than that of the surnames and forenames or initials of all the partners, the firm is subject to business name regulations which restrict or forbid certain words. The firm must also comply with the disclosure requirements i.e. disclosure of the names of the partners and an address at which documents can be served. This information must be clearly shown at the firm’s place of business, on business correspondence and on websites.
See further: Business and company names

Tax treatment: for income tax purposes, the partners are taxed individually on their share of the profits. The firm itself is not liable for tax as it is not a legal person, For VAT purposes, the firm is liable to register and account for VAT as if it were a separate person, although the partners are ultimately liable for VAT.

For more information about partnerships, go to the Business Link site and the HMRC guidance at HMRC-partnership

How to set up a partnership:
* Choose a business name if not using the names of the partners
* Prepare and sign a partnership agreement
* Register the partners with HMRC as self-employed
* Consider whether and when you should apply for VAT registration.

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