Legal structures for businesses - an overview

There are three types of partnership:

• 'ordinary' partnerships
• limited partnerships
• limited liability partnerships (LLPs)

Common features of all types of partnership

All three types of partnership have the following features in common:

• two or more persons - ie the partners - share the risks, costs and responsibilities of being in business
• a partner can be an individual or another business, eg a limited company or another partnership
• the partners share the partnership's profits and gains, unless the agreement says otherwise
• each partner is personally responsible for paying tax on their share of the profits and gains, and for their National Insurance contributions
• each partner must register for Self Assessment with HM Revenue & Customs (HMStarting a RC) and complete an annual tax return
• a nominated partner must also send HMRC a partnership return
• partners raise money for the business out of their own assets and/or with loans
• the partners themselves usually manage the business, although they can delegate certain responsibilities to employees
• it's possible to have 'sleeping' partners who contribute money to the business but are not involved in running it from day to day
• the partnership must keep records showing business income and expenses

'Ordinary' partnerships

An 'ordinary' partnership has no legal existence distinct from the partners themselves. If a partner resigns, dies, or goes bankrupt, the partnership must dissolve. However, the business can continue.

A partnership is a relatively simple and flexible way for two or more people to own and run a business together.

Ordinary partnerships also have to be registered with HMRC for tax purposes. The nominated partner does this by registering the partnership for Self Assessment.

Limited partnerships

A limited partnership is made up of a mixture of ordinary partners and limited partners.

Limited partnerships must register with Companies House but don't generally have to file annual returns or accounts. When they receive the registration Companies House inform HMRC that the limited partnership has been set up. HMRC will set up the partnership's tax records so there is no need to register with them.

A limited partner's liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.

Limited liability partnerships (LLPs)

LLPs must have at least two designated members. LLPs are taxed as partnerships, but have the benefits of being a corporate entity, and members have limited liability.

LLPs must:

• register with Companies House
• send Companies House an annual return
• file accounts with Companies House

When they receive the registration Companies House inform HMRC that the LLP has been set up. HMRC will set up the LLP's tax records so there is no need to register with them.

For further information see set up a business partnership.