What is a limited partnership?

What you are about to learn in this article is to understand what limited partnership works as well as its advantages and disadvantages. 

What is a partnership?

The main reason for going into business is to make maximum profit from whatever goods or services you are putting up for sale. Therefore, sometimes, setting up as a sole trader may not be of advantage since you are going to be bearing the liabilities alone. 

A partnership simply involves two or more individuals or businesses going into partnerships together by becoming a single entity. 

The goal of a business partnership is for partners to come together for a common goal of providing goods and or services to a specific customer type.

Now, all the partners may be individuals or registered businesses that are seen as legal entities. In other words, an individual can partner with a business, individuals can partner together as a group, or businesses can partner as a group. In any case, each individual or business that makes up the partnership is individually regarded as a partner instead of as a shareholder as compared to limited liability companies.

There are two types of legal structure for limited partnership and they differ also in their formation and incorporation. This is discussed in the following subheading.

Types of limited partnership legal and their setup: step by step

There are two types of limited partnership and each differs in its set up too.

Limited Partnership (LP)

They must have at least one general partner and one limited partner. In other words, either can be more than one. One important thing to know is that while liability is not limited to a single individual as for the sole trader, each partner is equally liable to any liability the business may have although the general partner could have more liability depending on the initial agreements made while setting up the business.

When the business cannot bear its liability by itself, the partners bear the remaining. Each partner also pays tax on their share of the business profit through the HMRC’s Self-Assessment portal. This is because each is regarded as self-employed.

How to set up a Limited Partnership

If you have determined that this structure is good for your business, then you must take the following steps to set it up.

• Choose a legal name – While you can choose to include the names of all the partners in the name, you can also choose a different but unique name to represent the business. However, there are rules guiding choosing a name for limited partnerships. The rules are that the name cannot end in LLP (limited liability partnership) or PLC (public liability company), must be unique, and must not be offensive. Also, there are words that you are not permitted to use in your name unless you are duly certified.
  
   
• Choose a registered office address – although your business may not be physically present at such an address (for example when you use a PO Box) it must be in the same jurisdiction as where your business is to be registered. For example, if the business is in England and Wales, then the registered office to be provided during registration must be anywhere within the country. Using your home for this is possible too but the disadvantage to that is that your home address becomes public knowledge and can be accessible to anyone. It is however important that when you are using a PO Box address, you must include the physical address of the post office as well as the postcode.
  
   
• Choose the general and limited partners – one thing to note here is that one individual cannot be the general and limited partner at the same time; therefore, there must be at least two partners in a limited partnership at all times. A limited partner cannot manage the business, take back their initial contribution, or be liable for more than their initial capital contributed to the company in case of debt or insolvencies. A general partner on the other hand is liable for any outstanding debt the business may have, manages the business, and makes major decisions. 
  
   
• Register with the Companies House – they must compulsorily register with the Companies House before they commence business using the LP5 form. The general partner can download the form and fill it but it must contain the signature of all partners before it is submitted by mail to the Companies House. It costs just £20 and it will take about 5 working days to get a confirmation of registration. Getting a same-day registration service was possible before but has been suspended till further notice.
  
   
• Register to pay tax with the HM Revenues and Customs – the HMRC is the official agency for tax collection in the UK for individuals and businesses. Tax payments for the LPs are through the following ways,
  
  
  • The LP pays tax through Self-Assessment – the business as a single entity must pay tax.
    
     
  • Each partner registers to pay tax with Self-Assessment – each partner must pay tax on whatever profit they make from the business after removing the personal allowance of £12,570. It implies that if you do not make up to that in a year, you will not pay tax but you must still register for Self-Assessment so that the government can keep track of your earnings.
    
     
  • Register to pay VAT if you expect to earn more than £85,000 – this is only important if the company earns more than the threshold in profit per year. Although you can opt to register for VAT voluntarily, the moment your company begins to make more than the threshold, you are compulsorily required to register for VAT with the HMRC.

Limited Liability Partnership 

In this case there is more than one person involved in the partnership which can be individuals or corporate entities. However they are incorporated partnerships where the partners are separate entities of the business. Also, partners are not shareholders and therefore not paid dividends but profits. 

How to set up a Limited Liability Partnership

• Choose a business name – The name must be unique and must not be offensive. Also, there are words that you are not permitted to use in your name unless you are duly certified. However, while it is not compulsory to register your business name, you can do it as a trademark if you do not want it used by another business or company.
  
   
• Choose a registered office address – although your business may not be physically present at such an address (for example when you use a PO Box) it must be in the same jurisdiction as where your business is to be registered. For example, if the business is to be registered in England and Wales, then the office address to be provided during registration must be anywhere within the country. Using your home for this is possible too but the disadvantage to that is that your home becomes public knowledge and can be accessible to anyone. It is however important that when you are using a PO Box, you must include the physical address of the post office as well as the postcode.
  
   
• Choose the designated partners – this type of company must have at least two designated partners who are tasked with the responsibility of managing the business. The designated partners are responsible for incorporating the LLP with the Companies House, registering it with the HMRC to pay tax through Self-Assessment and or VAT if and when applicable.
  
   
• Compose an LLP agreement – you can write the agreement by yourself with the agreement of all partners or you can get a legal practitioner to do it on your behalf. 
  
   
• Register with the Companies House – they must compulsorily register with the Companies House before they commence business. Since the registration process is quite tedious, you can choose to do it through a third-party agent. Alternatively, if you have the knowledge required, you can choose to do it by yourself through the Companies House portal by filling out the LL IN01 form online or by post.  It costs just £40 but you may pay higher if you need a same-day registration service.
  
   
• Register to pay tax with the HM Revenues and Customs – the HMRC is the official agency for tax collection in the UK for individuals and businesses. Tax payments for the LLPs are through the following ways,
  
  
  • The LLP pays tax through Self-Assessment – the business as a single entity must pay tax.
    
     
  • Each partner registers to pay tax with Self-Assessment – each partner must pay it on whatever profit they make from the business after removing the personal allowance of £12,570. It implies that if you do not make up to that in a year, you will not pay tax but you must still register for Self-Assessment so that the government can keep track of your earnings.
    
     
  • Register to pay VAT if you expect to earn more than £85,000 – this is only important if the company earns more than the threshold in profit per year. Although you can opt to register for VAT voluntarily, the moment your company begins to make more than the threshold, you are compulsorily required to register for VAT with the HMRC.
    
     
• Keep the Companies House informed – the designated partners or members of the LLP must keep the Companies House informed of any changes to the business, agreements, or partners. They must also file annual accounts as well as confirmatory statements every year to the Companies House. This is important or they could be legally prosecuted and the LLP may be taken off the Companies House register as a penalty.

Conclusion

Setting up your business as a partnership is quite beneficial to being a lone ranger in business. One such benefit is that it can be sustained if one partner dies and when you set up as an LLP, the business becomes a separate legal entity to its owners.