Setting Up a Partnership vs a Limited Company
Partnerships and limited companies are set up in different ways, to set up a limited company, you need to register with Companies House and let HMRC know when you start trading.
At least one director, one shareholder, and articles of association are required.
On the other hand, under the Partnership Act 1890, a partnership can be created automatically simply by carrying on a business with another person with the intention of making a profit.
Setting up an ordinary partnership or an LLP can involve steps similar to those for forming a limited company.
However, partnerships do not need articles of association or formal appointments of directors or shareholders. The partners own and run the business directly.
Liability: personal risk & protection
Liability is one of the main differences between a partnership and a limited company.
Shareholders in a limited company are not personally responsible for company's debts.
They only risk what they have invested.
In a partnership, each partner can be personally liable for business debts.
Limited liability partnerships (LLPs) offer a middle ground. In an LLP, each partner’s liability is typically limited depending on the terms of the partnership agreement and their investment in the business.
Management & control
There are also important differences in how each structure is managed.
In a partnership, the partners both own and run the business day to day.
In a limited company, directors are responsible for managing the business, while shareholders own the company.
In practice, these roles are often held by the same individuals, particularly in smaller businesses.
Financial transparency & reporting
Financial reporting rules are different for each structure.
Limited companies must prepare and publish a summary of their annual accounts; partnerships do not have to publish or audit their accounts, no matter how much they earn.
Tax considerations for Partnerships & Limited companies
Tax rules also differ between partnerships and limited companies.
Profits kept in a limited company are usually taxed at the corporation tax rate, which can be lower than the income tax rate paid by partners; understanding this can help if you plan to reinvest profits.
However, while partners and directors pay similar income tax rates, directors in a limited company are subject to higher National Insurance contributions than partners.
This can increase the overall tax burden for both the individual and the business.
As a result of this, a limited company may need to generate significantly higher income to provide the same net return as a partnership.
When deciding on a structure, think about your financial goals and how you want to manage profits and capital in the long term.
Tax rules can be difficult to understand and vary widely, thus it is always best to get advice from an accountant or specialist tax adviser.
Ownership & Flexibility Considerations
Ownership works differently in partnerships and limited companies, in fact limited companies generally offer greater flexibility in ownership.
Shares can be issued, transferred, or structured in different ways, and share schemes or director roles can be used to incentivise employees.
Partnerships are less flexible. Bringing in salaried or equity partners is possible, but it is often more complicated than issuing shares in a limited company.
Legal assistance for Partnerships & Limited companies
Your choice of legal structure will affect every part of your business, from liability and tax to management and future growth.
Choosing the right structure is a main decision, getting specialist legal advice from us at Orwins and having a clear business plan will help set your business up for long-term success.
