Sole Traders / Partnership
May 16, 2015 1:00 AM   Subscribe

What are the advantages and disadvantages of setting up a partnership as opposed to sole trading? (UK Tax Filter)

I'm setting up as a part-time freelance business consultant with a friend. We are both in the UK. We're unsure about the difference between each separately registering as sole traders or setting up a partnership. We are clear that it would not be appropriate for us to register as a limited company, a “limited liability partnership” or a “limited partnership”, but are not sure if a “partnership” would be appropriate.

Neither of us are putting capital into the business and we are very unlikely to be at risk of business debts. We are not sure if we will invoice clients separately or whether we will set up a joint business bank account and ask clients to pay into that.

We've looked at the HMRC guidance (sole trader definition and partnership definition) but are still not clear. It feels as if partnership should be more appropriate as we are working together, both will be charging the same rate and earning the same amount, but on the other hand we would prefer each to be responsible for submitting our own tax returns separately, and it looks as if only one person can submit the joint tax return for a partnership (“the nominated partner”).

Any advice would be helpful – we are struggling to interpret different information in various books and websites. We are happy to take professional advice and pay for that if necessary, but would like to be a bit clearer ourselves first. Thanks.
posted by sock of ages to Work & Money (3 answers total)
1) The partnership would invoice clients and needs its own bank account in the name of the partnership - not sure why you have discounted a limited liability partnership as that would give you some more protection or a limited company as that is more tax efficient

2) You could then split the profits how you like i.e. if one of you does 60% of the work then that person can have 60% of the profits (this is harder to do in a limited company but there are ways of doing it)

3) The partnership tax return is a completely separate (and additional) return it is not a joint tax return for the two of you in the conventional sense - it allocates the profits of the partnership between the partners - each partner then uses their total from the partnership tax return to fill out their own individual tax return

Some disadvantages are:

1) More compliance costs i.e. paying for the partnership tax return to be prepared (unless you did it yourself...)
2) VAT - your combined incomes are likely to lead to you reaching the registration threshold earlier than two completely separate businesses (though if you are "working together" substantially HMRC might argue that they are in fact one business and need to register)

Does that help?
posted by Metaphysics at 3:05 AM on May 16, 2015 [1 favorite]

I don't know UK law, (nor US law) but I did look into some general compliance issues.

A "partnership" basically doubles the risk. EITHER of you can sink the company, and thus, each other. While it is a corporate entity in itself, it's basically sole proprietorship X 2.

It is best you spend the little money to incorporate and conduct all business through the corp, even transferring some assets to it and get separate bank accounts, so if anything happens, your liability is limited by the corporation.
posted by kschang at 9:33 AM on May 16, 2015

Response by poster: Hi both, thanks for your answers. It's helpful to understand that the partnership tax return is separate from and additional to our own tax returns, thanks Metaphysics.

We really are pretty sure that it would not be worth us registering as a company, because of the low level of risk involved and the fact that we will not reach the VAT threshold. I have been sole trading in the same business previously so my preference would be for us to remain sole traders to keep it simple, but we will take professional advice.
posted by sock of ages at 2:10 AM on May 17, 2015

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