A partnership is an arrangement in which two or more parties collaborate to achieve a common goal by working to gather. It could be among two individuals, organizations, or businesses. In this kind of business, usually, profits and losses are distributed among partners equally unless until there is any share distribution is finalized through a signed agreement between partners. A joint venture is also called a temporary partnership that comes into existence for completing any specific project collaboratively, and after the completion of that project, this partnership also comes to an end.
Investment, Contribution, and Profit-Sharing Mechanism
The distribution of risks and rewards, level of giving and take, areas of accountability or responsibility, investments, and powers are negotiated and decided by the partners at the time of partnership formation. It is probable that one partner is providing the whole investment while others are offering skills to manage the business and contribute to the accomplishment of the business goals and objectives collaboratively. Normally in partnerships, all the profits and losses are shared on an equality basis unless any signed agreement about the profit/loss distribution scheme among the partners.
In the partnerships, like sole traders, partners are liable to pay taxes on the gains from their business under the banner of personal taxes instead of paying taxes as a business. According to the HMRC’s taxation regulations, partnerships also fall in the self-assessment taxation mechanism, and every partner is bound to pay tax on his shares accordingly. In addition, if a partnership is earning equal or above the set threshold of £85,000, it is required to be registered for VAT with HMRC within 30 days after the realization meeting the threshold.
Important Components of a Partnership Agreement
In order to avoid misunderstandings or issues on the profit/loss sharing mechanism, a partnership agreement is a must in the partnership formation. Partners are the stakeholders to determine the clauses of that agreement. The included components or clauses might be as
- Every partner will contribute to investments
- Segregation of the profit/loss shares for each partner
- The interests on the capital will be paid to the partners by partners on the decided interest rate.
- Segregation of management responsibilities and share in decision making
- The procedure of retiring any of partners
- SOPs for new partners to enter in an existing partnership
In case there is no agreement is signed among the partners, according to the partnership act 1890, all the partners are entitled to get equal share in the profits and are equally liable for contributing to the business operations.
Advantages and Disadvantages of Partnership Arrangement
Reduced risk and mitigation of loss by sharing in the partners are the main benefits of a partnership arrangement. In the absence of one partner, others can be present to run a business smoothly. Furthermore, a business can make use of the expertise and skills of different persons. Partnership arrangements make it easy to expand businesses with the investment of every new partner. Business management becomes easy with collaborative decision making, and fewer people can make better decisions keeping their and affected people’s interests in mind.
On the other hand, as every partner is personally liable for debits and errors or mistakes of each other. Also, the contradiction of interests and disagreements can arise and can lead the partnership to be ended.
Partnerships are usually medium-sized businesses that require experts to deal with their taxation, VAT registration, year-end accounts, and perfect sharing of profits and losses among partners. In this regard, you should go for hiring expert accountancy like ProAccountax instead of wasting money and time on inexperienced accounting providers due to low budgets. ProAccountax offers a wide range of services for partnership businesses, including:
- Industry-specific accountants
- Enactment of approved accounting mechanisms for your business
- Automated Xero supported and manual bookkeeping services
- Coping with HMRC queries and other judgmental or legal aspects on your behalf
- Aid in getting your business registered for PAYE, VAT, and other requirements
- Completion of self-assessment, capital gains tax and other taxes payables and returns
- Complete assistance for getting registered as a partnership with Companies House
- Management of annual accounts and timely preparation of year-end financial reports
- On-time updates and reminders about taxation matters
- 24/7 customer care facility to deal with your queries and providing up to the mark advice and solutions.
Our Fees and Charges
We offer a complete package of accounting and business consultancy services along with additional yet valuable services at best affordable prices in order to help our client businesses in getting their accounts managed, and taxation matters are tackled in very low budgets. Our services for partnership businesses are starting from £30 and further depend on your business size.