Legal advice from Eleanor Woodall, trainee commercial solicitor at FDR Law Bold Street, Warrington.
Partnership vs Limited Company
Q: I am setting up a new business with a friend, should we register as a partnership or as a private limited company?
A: Firstly congratulations on your new business venture.
When starting a new business it is important to understand the main differences between the two types.
A private limited company is a legal entity, run by directors and owned by shareholders. Often in smaller companies these are the same people. Limited companies are required to register at Companies House and data including the identity of directors, shareholders and financial accounts is publicly available.
A partnership comprises of two or more people sharing the right to make business decisions and in the net profits. They are also responsible for debts and obligations without limit. In contract private limited companies have reduced risks, as liabilities (debts) are separate from the owners. The liability of shareholders is limited to the price paid for their shares with only a few exceptional circumstances to this.
Both business models have tax advantages and disadvantages and we would strongly advise you to contact your accountant to discuss these further. Partners are required to register as self employed with the Inland Revenue, and are taxed on their share of the partnerships profits. In comparison a private limited company is responsible for paying corporation tax, and directors must pay national insurance contributions alongside income tax on salaries.
For a start-up limiting personal liability that a private limited company can offer may be more attractive but there is more work and costs - filing of accounts; annual returns; corporation tax returns and paying income tax.
Setting up a new business is an exciting time, however the correct choice of business model is important. Tax and legal considerations as well as commercial issues can have an effect on the business for many years to come. The type of business also has to be factored into your decision, for example what type of trading you are involved in and how many people you employ.
Whether a limited company or a partnership you should have a legal contract.
In a partnership this would be a written partnership agreement, outlining your relationship, requirements, responsibilities and the sharing of profits and losses. In a company as well as the Articles of Association you should also have a shareholders’ agreement to govern the relationship between shareholders and to provide for an exit strategy.