One of the most crucial decisions you’ll make as a business owner is choosing the structure for your business. The choice you make will impact liability, tax, management and ownership.  

Two common options business owners take are a Partnership or a Limited Company. Both have their pros and cons.

This blog aims to help you understand the difference between the two, enabling you to decide which structure is best for you.

What is a Partnership?

A partnership is an arrangement where multiple partners share ownership, including profits, work, responsibility, and potential losses. Partners generally have unlimited liability, meaning they can be held personally responsible for any debts and actions incurred by the partnership. Meaning there is no distinction between the partners and the partnerships, resulting in no legal protection for the partners involved.

The setup of a partnership is relatively straightforward and typically involves a written agreement that outlines the terms of the arrangement.  

Partnerships are not taxed as a separate entity. The business’s profits and losses are allocated to the individual partners, who report them on their personal tax returns.  

What is a Limited Company?

A Limited Company is a business structure where the owner's assets and income are separate from those of the company and incomes are, the structure of a Limited Company allows the company to be a separate entity from its owners (shareholders) and Directors. This means the company can enter contracts, own property and be sued in its own right.

Directors are generally not personally liable for the company’s debt, unless they have provided a personal guarantee or have been found guilty of wrongdoing.  

For example, if a director has not upheld their responsibilities such as maintaining proper financial records or signing a contact knowing they cannot fulfil their obligations.

How to decide which structure is best for you?

Firstly, you need to understand what the business you are creating does and who will be involved (are they family, spouse, business partners?).

The key question to ask yourself is what is the long-term goal of the business?  

• Is it a going to be a family business which will be passed down to your children in the future?

• Have you taken over a partnership business and want to convert to a Limited Company? As this may come with tax implications.

Are you looking to build a company that attracts investors, or are you intending to sell it in the future?

Limited Company Tax Benefits

Having a Limited Company offers more flexibility in terms of tax. For example:

• Corporation tax is payable at a percentage between 19% and 25%, whereas profits from a partnership can be taxed at either 20%, 40% or 45%.

• You have more control when you are taxed as an individual after the company has paid its Corporation Tax.

It is more appealing to investors because it’s easier for them to purchase a percentage of the company shares with the benefits of limited liability, although it does come with more administrative work compared to setting up as a Partnership.

‍

This is simply the tip of the iceberg of a very complex topic, which can vary from each business's situation. If you’re unsure on which route to take or would like more support in choosing your business structure, we recommend consulting with your accountant or a business advisor.

‍

‍