A general partnership is a way of operating a business with two or more people or corporate members. Just like any other business structure, they can come in all shapes, sizes, and industries, from manufacturing to not-for-profits.
Although a partnership can feel like a limited company in terms of people collaborating for the same business, the tax process and personal liability is different. In this article we’ll explain what general partnerships are, and how they’re taxed. You can also find more guides and templates for partnerships in our resource centre.
What is a general partnership?
An ordinary (or ‘general’) partnership is where two or more people or other organisations band together to carry out business.
Do general partnerships need to be registered?
A general partnership is different to a limited company or Limited Liability Partnership (LLP) in that it doesn’t register at Companies House. Instead, the nominated partner (the partner responsible for admin) must register the partnership for Self Assessment with HMRC.
Do I need a partnership agreement?
They’re not mandatory for general partnerships, but it’s always useful to set out an agreement in advance. It should include details about who the partners are, how to divide the profits, as well as who is responsible for what, and what level of control they have.
A partnership agreement will also set out what to do in the event of a death in the partnership, how it can be terminated, and what happens if there is a dispute. It is highly advisable to put a partnership agreement in place, otherwise you may find yourselves in difficulty if things go wrong.
Who can be in a general partnership?
Although the majority of partnerships are between real people (often called ‘natural people’ in law), partnerships will sometimes include one or more partners who aren’t ‘natural’ at all.
A general partnership can have an unlimited number of partners which can be real people, organisations, or a combination of both. For example, the partners in a partnership might all be limited companies, or even other partnerships! This point is crucial for understanding how partnerships pay tax (which we’ll get too shortly).
Each partner will need to register as well as setting up the partnership itself, so HMRC know they’re part of the business. Corporate bodies, public organisations, or charities and not-for-profits might all get involved in a partnership for a variety of reasons.
Typically, these bodies will become involved with partnerships where they are aiming to achieve a common goal. For example:
- They may want to collaborate in order 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
How do partnerships pay tax?
When it comes to paying tax in a general partnership, it’s useful to understand the idea of tax transparency.
This can seem confusing because general partnerships still need to submit SA800 Partnership Self Assessment tax returns, even though they don’t pay tax. Submitting a return simply allows HMRC to see what profits have been made by the partnership, who the partners are, and what their share is. But HMRC doesn’t expect tax based on this.
Instead HMRC ‘look through it’ to what the partners are earning from the partnership, and they’ll pay tax on their share of the profits according to what type of tax return they need to submit. For example:
- If the partner is an individual, they will submit their own Self Assessment return and pay income tax and National Insurance on their share of the profits
- Partners who are limited companies will include their share of the profits in their company accounts, and report it as part of their Company Tax Return
Capital Gains Tax in general partnerships
Partners also need to be aware of Capital Gains Tax on disposals. In the same way a company owner may need to pay Capital Gains Tax when they sell shares in their business, a partner may be liable for Capital Gains Tax when they sell their interest in a partnership.
Capital Gains Tax may also be payable if the partnership takes on a new partner, and they pay a premium to join.
Can you be in a partnership and still pay PAYE?
There are two ways members of any type of partnership might find themselves paying PAYE. One reason is that 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.
Tax can be confusing at the best of times, particularly in partnerships! Learn more about our online accounting services, call 020 3355 4047 to speak to one of the team, or get an instant online quote.
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