This guide looks at the requirements that ordinary partnerships and limited partnerships have to meet.

A partnership is a relatively simple and flexible way for two or more people to own and run a profit-making business together. Social enterprises and other non-profit-making organisations should not use this business structure.

Unlike the shareholders in a limited company, the members of a general partnership have no financial protection if the business runs into trouble - each partner is responsible for the debts of the partnership as a whole. This means that partners' personal assets may be at risk if the business fails.

Disputes between partners can cause difficulties, and the partnership may have to be dissolved if one of its members resigns or dies. It's possible to avoid this kind of problem by drawing up a legally binding partnership agreement, but you will need to pay a solicitor to do this.

The members of a partnership

Any group of people that wants to set up a profit-making business together can form a partnership. However, if a member of a partnership is under the age of 18, he or she cannot be legally bound by the terms of the partnership agreement.

It is also possible for companies to be members of a partnership, in which case they will have tax and reporting obligations on top of those of individual partners. Individual partners must register as self-employed with HM Revenue and Customs. See the page in this guide on the tax matters of a partnership.

How many members can a partnership have? 

Forming a partnership allows two or more people to set up in business together, sharing profits, managing burdens and risks.

The rights and responsibilities of the partnership's members

The members of a partnership normally share in both the responsibilities of running the business and the profits or losses that it makes. However, their precise rights and responsibilities will depend on:

• what type of partner they are
• any partnership agreement or "deed of partnership" that they have entered into

Types of partner

There are three main types of partner, each of which has different rights and responsibilities:

General partners

General partners invest in the business, take part in running it and share in its profits. Each general partner is fully liable for any debts that the partnership may have. This means that they could lose more than their initial investment in the business if it runs into trouble, and that their personal assets could be at risk. Every partnership must have at least one general partner.

Sleeping or dormant partners

Sleeping partners invest money in the business and share in its profits, but do not take part in running it. Like general partners, they are fully liable for the partnership's debts.

Companies

Companies can be members of a partnership. If so, they have the same rights and responsibilities within the partnership as other partners, but they also have some additional tax matters and reporting obligations. See the page in this guide on tax matters of a partnership. Partnerships whose members are all companies have to prepare "partnership accounts" and send these to Companies House or the Northern Ireland Companies Registry each year. The members of these partnerships must attach a copy of these accounts to their own company accounts when they submit these to Companies House.

Get guidance on partnerships for businesses in Northern Ireland at the Department of Enterprise, Trade and Investment Online website.

Partners can also limit their liability for debts. See the page in this guide on limited partnerships.

Deed of partnership

A deed of partnership is a legally binding agreement between the partners that are setting up in business together. It describes how the partnership will be run and the rights and duties of the partners themselves.

It's not necessary to have a deed of partnership in order to set up a partnership, but it's a good idea, as it will help to avoid misunderstandings and disputes between partners in the future. If the partnership does not have a deed, it will be governed by the terms of the Partnership Act 1890 which does not offer solutions to many of the problems that can arise and may not suit the way that you and your partners want to work together. Read about the Partnership Act 1890 on the HM Revenue & Customs (HMRC) website.

As well as giving basic information about the partnership, such as its business name and the names of the partners, the deed will usually set out:

• the amount of capital that each partner is to contribute to the business
• the way in which partners will share profits, and whether any of the partners should be paid a salary
• working arrangements, such as how much time each partner should contribute to the business
• changes to the partnership, such as how new partners can be appointed and what happens if a partner dies or wishes to leave the partnership

Tax matters of a partnership

The profits are shared amongst the partners. Individual members themselves must pay income tax on these profits, not the partnership.

In most cases the partnership's members will be self-employed, so each member must include details of any profits they get from the partnership on their individual self-assessment tax returns each year. Self-employed partners are responsible for paying their own National Insurance contributions (NICs). It's important that each member of the partnership should register as self-employed with HM Revenue & Customs (HMRC) - you can download a notification form to register as self-employed from the HMRC website (PDF).

It is also possible for partnership members to be companies rather than individuals. If so, they must pay corporation tax on their profits from the partnership, and should include the profits on their self assessment return for corporation tax. 

If the partnership has - or expects to have - turnover of more than £60,000 a year, it will need to charge VAT to its customers and pass this on to HMRC. See our guide on when to register for VAT.

Partnerships with employees will need to collect and pay income tax and NICs, which will mean operating a PAYE (Pay As You Earn) system.

What does a new partnership need to do about tax?

Contact your local HMRC office to let them know that the business exists. They'll send a Partnership Tax Return, which must be filled in to show the partnership's income and expenses for the tax year. This includes a Partnership Statement, which shows how profits or losses have been divided amongst the partners.

The partnership should appoint one of its members - the "nominated" member - to fill in the Partnership Tax Return and send it to HMRC. They should also ensure that all other members are given copies of the Partnership Statement to help them complete their own personal tax returns.

Although the nominated member has responsibility for the Partnership Tax Return, all the partners will have to pay any penalties resulting from it being submitted late or incorrectly.

Limited partnerships

A limited partnership is any partnership that includes one or more limited partners amongst its members. It is not the same as a limited liability partnership.

A limited partnership must be registered with Companies House. All partners must sign the limited partnership statement, and there is a £2 registration fee. The same day registration service is no longer available as of 3 October 2005.

The limited partners' responsibility to pay the partnership's debts is limited to the amount that they have invested in the company. However, if they withdraw any of their investment or take part in the management of the partnership, they lose this protection. They become liable for debts or obligations to the amount they have withdrawn or received from the partnership. Limited partners taking part in management are liable for the extent of debts and obligations incurred during this period.

Further advice

Setting up a limited partnership brings many obligations and it would be worthwhile taking advice from a solicitor or accountant before choosing this route.

Companies House is also happy to guide you through the registration process. Find a useful introductory guide to limited partnerships at the Companies House website.

Get guidance on limited partnerships for businesses in Northern Ireland at the Department of Enterprise, Trade and Investment Online website.

Naming your partnership

A partnership can trade under the names of the partners, Wright, Brown and Ali, for example, or it can use another business name - such as Fantastic Design Solutions, for example.

If your trading name does not include the partners' names, you must still make sure that your business stationery - such as letters and invoices - displays all of their names as well as the trading name for example, "Wright, Brown and Ali, trading as Fantastic Design Solutions". If there are more than 20 partners then the business stationery does not have to list them, but it must show the address of the partnership's principal place of business.

The trading name should not be the same as or too similar to that of any business that already exists, and it should not contain words that people might find offensive or misleading.

For more information see our guide on how to choose the right name for your business.

Get guidance on naming partnerships for businesses in Northern Ireland at the Department of Trade, Enterprise and Investment Online website.

Checklist: setting up a partnership

In order to set up business as a partnership there are certain things you need to do - some must be done as a group and others as individual partners. You should:

• Display all the partners' names at all your business premises together with the address to which official documents should be sent.
• Display all the partners' names on your business stationery, including letters, invoices, receipts and cheques along with your principal place of business. If the partnership has more than 20 partners you need only display your principal place of business.
• Register as self-employed with HM Revenue & Customs (HMRC). This must be done by each individual partner.
• Contact HMRC to register your partnership's existence and register for VAT if you expect to turnover more that £60,000 a year.

It's worth remembering, though, that this is just a start. As an ongoing business, your partnership will have many other legal and tax obligations to bear in mind. Use our interactive tool to get a beginner's guide to tax and accounts rules.