OnTax Dunfermline Accountant Discuss:

A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore exhibits elements of both partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence.

An LLP is of particular interest to lawyers, accountants, engineers and other professional groups involved in technical, legal or complex work where clients can end up sueing.

In contrast, in an ordinary partnership any liability for misconduct or wrongdoing is upon the partnerrship. This can include tax avoidance activites. Therefore, partners of traditional partnerships need to think very clearly about what they are gettting into.

In the first instance, we recommend you and your prospective business partner sit down and talk things through. Discuss who is doing what.

Once you have established who is doing what, please do consider getting a legal document drawn up to confirm this, it will solve many problems later on.

Lastly, make sure to register the partnership with HMRC as well as regsiter yourselves as partners of it.

Every partner has the right to take part in the management of the partnership business. This is subject thought to what was agreed in writing in the partnership agreement.

As a partnership, as far as the tax man goes you need to keep adequate records from which a tax return can be produced. We can help you do this.

Each partner is responsible for submitting their own tax return and paying thier own national insurance contributions. Both partners thought bear a liability to ensure that the partnership tax return is filed, unless one of you is the nominated partner.

In the abscence of a partnership agreement, it is assumed that all partners have equal rights in making decisions and at the same time all partners share equal obligations.

At the beginning of any business partnership, the partners usually envision a long-term relationship, this is clear because they all invest time and money in getting the venture started. In reality, very few partnerships succeed beyond 12 months. This is often due to expectations not being met or personal issues arising. Hint: This is why wwe always insist you get your partnership agreement in palce so that you are protected legally.

If you wish to leave the partnership you must end things amicably with the other partner and ensure your share of liabilities to the point of leaving are met. Then, on your tax return you must inform HMRC of the date of cessation.

However, it is possible there may be some financial gain in you leaving the partnership. This could be by way of the other partner(s) buying you out. If the company is making money this should  not be a problem, however if the company is struggling, realisitically a buy-out is not viable.

To ensure that no obligations exist upon you on leaving the partnership, we highly insist that you consult a lawyer, you may just thank us for this advice!

In the abscence of any official agreement it is assumed that all partners have an equal stake in the partnership. However, there can be situations when you wish to alter this. A classic example is when one person is the "leading light" and the other partners are merely "ancillaries" to the venture.

In such circumstances you may wish to alter the shareholding so that one partner has a greater % share and the other partner a lesser share.

The decision really is between the partners to decide what best fits the requirements of the venture.

Partners are entitled to a share of the partnerships profits in proportion to their stake int he shareholding. i.e a person having a 40% stake in a partnership is entitled to 40% of its net profits.

Generally speaking you would not change a partnership shareholding year on year. There is however no legal requirement around this. The % shareholding should be agreed in advance before any calendar period so that each person is aware of what effort they need to make and what the reward shall be.

It has to be remembered that unless agreed otherwise, the assets belong to the partnership and not the partners. If the asset was aquired by the partnership it is assumed the partnership owns it wholly (and not the partners in varying percentages).

Thus, when a partnership asset needs to be disposed of, the proceeds should go into the partnership and from there be distributed to the partners.

There are many advantages to trading as a partnership.

It may be that between you the necessary funds can be raised, the skill levels are adequate to ensure the viablity of the venture and that you can appraise risks together and arrive at solutions together.

Partnerships are like any relationship, they thrive on the skills of the participants but can die on the lack of necssary skill and input as well. All in all a partnership may be a good decision if there is a good match of skills and financial input form both sides.

There are many upsides to a partnership. But, there are also downsides, some of them very serious.

Disadvantages of a partnership include that: the liability of the partners for the debts of the business is unlimited. each partner is 'jointly and severally' liable for the partnership's debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts.

Further, if misconduct, fraud or worse occurs the partnership itself could become liable and as a consequence all the partners. In laymans terms this means you could become liable for the bad conduct of another.

Another danger is dis-agreements between partners resulting in the bad running of the venture. Worse still is when one partner perceives that the other is not putting in their required amount of time and effort.

We urge all potential partners to think long and hard about what they are committing to and to seek legal advice as well putting in place  a formal parnership agreement.

A partnership, as well as the individual partners making up the partnership each have resepective tax registrations. This means that a minimum of 3 tax returns are required for each partnership (i.e one for the partnerships and 1 for each of the partners.)

The partnership itself does not pay tax or national insurance (although it may pay vat if so registered for vat).

First of all the accounts of the partnership are drawn up detailing all incomes and expenses so that a net profit is arrived at. Capital allowances are then calculated and as a result a taxable net profit is arrived at.

Each partners share of this net profit is then calculated. The split of  the net profit is recorded inthe partnership tax return as well as in each partners tax return.

So each partner is effectively taxed as if he were a self employed business, with profits equal to his share of the profits of the firm.