What is a partnership?
Definition of a partnership
A partnership is a business structure very like a sole trader except there is more than one person running and owning the business. The people who own and run a partnership are called partners.
A partnership prepares accounts in its own right and files a tax return, but a partnership does not pay income tax or class 4 National Insurance in its own right. Instead, each partner pays tax and class 4 National Insurance on their share of the partnership’s profits.
Partnerships may split profits between their partners equally, or unequally if this can be commercially justified, for example if one partner does more of the work of the business or has invested more money in the business. HMRC does not consider saving tax to be a commercial justification for unequal profit share, so allocating more profit to a partner who is a basic rate taxpayer and less profit to a partner who is a higher rate taxpayer may be challenged by HMRC.
Partners may be individuals, or limited companies. “Person” in this context means a legal person.
If a partnership is unable to pay its debts, the partners’ own personal assets, such as their homes and cars, can be taken to pay the debts. This applies even if that particular partner was not responsible for the partnership having incurred those debts.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.