Partnership -v- Limited Company

We are often asked “Which is really best - partnership or limited company?”

The answer is that it depends! Have a look below and decide what cover and what formality you feel you really want.

Partnership

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In a partnership, two or more people share the risks, costs, and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up. Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved.

A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.

Set-up - Each partner needs to register with the Inland Revenue as self-employed. It’s a good idea to draw up a written agreement between the partners.

Management and raising finance - The partners themselves usually manage the business, though they can delegate responsibilities to employees. Partners raise money for the business out of their own assets, and/or with loans.

Records and accounts - The partnership itself and each individual partner must make annual self-assessment returns to the Inland Revenue. All partners must keep records showing business income and expenses.

Profits - Each partner takes a share of the profits.

Tax and National Insurance - As partners are self-employed, they are taxed on their share of the profits. Each partner needs to pay fixed-rate Class 2 National Insurance contributions (NICs) and Class 4 NICs on their share of the profits.

Liability - Each partner is personally responsible for all debts run up by the partnership as a whole. This means their homes or other assets may be at risk if the business fails.

Limited liability company

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Limited companies exist in their own right in law and are separate from the shareholders who own them. Shareholders can be individuals or other companies. They are not responsible for the company’s debts (unless they have personally guaranteed a bank loan, for example). However, they may lose the money they have invested in the company if it fails. Private Limited Companies can have one or more members (eg shareholders). They cannot offer shares to the public (e.g. on the stock exchange).

Set-up - Must be registered (incorporated) at Companies House and have at least one director (two if it's a PLC) and a company secretary, who may also be shareholders.

Management and raising finance - A director or board of directors make the management decisions. Finance comes from shareholders, borrowing and retained profits.

PLCs can raise money by selling shares on the stock market, but private limited companies cannot.

Records and accounts - File accounts with Companies House. A "shuttle" annual return (form 363s) will be sent before the anniversary of incorporation each year. It needs checking, amending and returning to Companies House with the appropriate fee.

The directors and secretary are responsible for notifying Companies House of changes in the structure and management.

Profits - Profits are usually distributed to shareholders in the form of dividends.

Tax and National Insurance - Companies pay corporation tax and must make an annual return to the Inland Revenue.

Company directors are employees of the company and must pay Class 1 NI contributions as well as income tax on their salaries. If your company or organisation has any taxable income or profits, you must tell the Inland Revenue that your company exists and that it is liable to tax.

Liability - Shareholders are not personally responsible for the company's debts, but directors may be asked to guarantee loans to the company.

Contact Cousins Business Law for advice on this topic.

For free advice on this topic please call us on 0845 003 5639.