Audit and Accountancy

Partnership / Sole Trader Accounts

Tax changes, originating from the 2002 Budget, have made it even more important to consider carefully, when running a business, whether it is best to trade as:

  • Sole trader - an individual
  • Partnership - two or more individuals or companies
  • Limited liability partnership
  • Limited company.

We are often asked, "Should I form a Limited Company?" The reality is that there is no easy answer. Each situation has to be judged individually. As well as the obvious issues of tax and national insurance contributions, there are many other potentially relevant factors, such as:

  • The business
  • Its expected rate of growth
  • The degree of commercial risk
  • Administrative obligations
  • Personal preferences
  • Pensions and retirement.

In the early years of a business, the privacy of operating as a sole trader or partnership may be attractive. Business funds can be used at will with fewer restrictions than in an incorporated environment. A partnership is a relatively simple and flexible way for two or more people to own and run a profit-making business together. 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. 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 partners (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. Deed of partnership A deed of partnership is a legally binding agreement between the partners who 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. 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. The limited partners' responsibility to pay the partnership's debts is limited to the amount that they have invested in the business. However, if they withdraw any of their investment or take part in the management of the partnership, they lose this protection. Limited Liability Partnership In an ordinary partnership, the partners are personally liable for any debts that the business accrues. In the case of a Limited Liability Partnership however, it is the partnership as a legal business entity, and not the individual partners, that holds responsibility for any debts. The exception to this will be any business loans that have been personally guaranteed by one or more of the partners. While offering the advantages that come with limited liability, an LLP nevertheless gives a business the freedom to arrange its structure as an ordinary partnership might. If you are a sole trader or partner, you can choose not to prepare formal accounts, but you still need to keep records of income and expenditure over a set accounting period. You must include this information on your self-assessment tax return, so that the Inland Revenue can work out your tax.


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