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Sound Business and Legal Advice

Your Business Partner may or may not be your new Bestie! When starting a small business in the UK, a common question I get from new or potential business owners is whether it’s safe to go into a partnership and how it compares to setting up a limited company. This article will explain the key differences between these two business structures and help you understand what works best for your situation, without confusing legal jargon.

How Safe Is It to Enter a Partnership?

When we talk about safety, we’re mostly thinking about financial risks. A partnership is a straightforward business model where two or more people share the responsibilities, profits, and losses of running the business. However, one key thing to keep in mind is that in a general partnership, you and your partners are personally responsible for any business debts.

If the business gets into trouble financially, you could end up having to use your personal money to cover those debts. This can include your savings, your car, or even your home, depending on how much is owed. This is called unlimited liability.

Is There a Safer Way to Partner Up?

Yes, there is something called a Limited Liability Partnership (LLP). An LLP offers more protection because your personal assets are safer. The main difference between a general partnership and an LLP is that, in an LLP, partners aren’t held personally liable for the business’s debts beyond what they’ve invested in the business. However, setting up an LLP is a bit more complicated than a general partnership.

Can Creditors Claim Business Debts from Me Personally in a Partnership?

In a general partnership, yes, creditors can claim business debts from you personally. You and your partners are seen as the business, and you’re both personally responsible for any debts the business owes. Even worse, if your partner can’t pay their share, you may have to cover all the debt, not just your portion. This is called being “jointly and severally liable”.

On the other hand, if you set up an LLP, your personal liability is limited to what you’ve invested into the business, protecting your personal finances from creditors.

What Are the Pros of a Partnership as a Business Model?

Here are some advantages of choosing a partnership:

Simplicity: It’s easy to set up and doesn’t involve a lot of paperwork compared to other business types.
Shared Responsibility: You can split tasks and responsibilities with your partner(s), making the workload lighter.
Cost-Effective: It’s generally cheaper to start a partnership than to form a limited company.
Flexibility: You and your partner(s) can decide how to run the business and split profits as you like.
Privacy: Partnerships don’t have to publish their financial statements publicly, unlike limited companies, which must file accounts with Companies House.

Partnership vs. Limited Company: What’s the Difference?

Let’s compare the key points between a Partnership and a Limited Company:

Partnership	Limited Company
You and your partner(s) are personally liable for business debts (unless it’s an LLP).	Personal assets are protected. The company is its own legal entity.
Easy and cheap to set up.	More paperwork and costs involved in setting up.
Fewer formalities and regulations.	More legal requirements, such as filing annual accounts.
Profits are shared directly with partners.	Profits belong to the company and are taxed, but directors can be paid salaries or dividends.
No need to file accounts publicly (unless LLP).	Financial information is made public by filing with Companies House.

Which One Is Better for You?

If you want simplicity and don’t mind taking on personal risk, a general partnership might work well for you.
If you want to protect your personal assets from business liabilities, consider either an LLP or forming a limited company.
If you want flexibility with fewer rules to follow, a partnership is appealing. But if you’re okay with more paperwork in exchange for more legal protection, a limited company might be the better choice.

Conclusion

Choosing the right business structure is crucial when starting a business in the UK. While partnerships offer simplicity and flexibility, they come with the risk of personal liability. Limited companies, on the other hand, offer more protection but are more complex to set up and manage. Think about your financial risk, the size of your business, and how much control you want to maintain when deciding. And, always remember; Your Business Partner may or may not be your new Bestie!