Using a Business Partner

One of the most common forms of business format is the partnership. Running a franchise can require a number of skills all of which one person rarely possesses.

Successful business management is all about profits and gaining market share. A partner with financial or marketing skills could come in very handy indeed.

Partners in business

After the sole trader, the partnership is the next most popular format for business management. Partnerships have a number of unique aspects to their set-up and operation that include:

• The personal finance of each partner is completely separate.
• There is no limited liability in a partnership.
• Each partner is responsible for the overall debts of the franchise business.

Types of partnership

There are a number of different types of partnerships you could form to run your franchise. These include:

Sleeping partner
In some cases you may not want your partner to take an active role in the day-to-day operation of your franchise. Often, a sleeping partner will have invested some money in your franchise but has no interest in running it.

General partners
This type of partnership is the most common. Equal shares of the franchise business are owned by each partner who may well have also put equal amounts of investment into the business. The day-to-day running of the franchise is shared, as are the profits and of course the debts.

Companies
A partnership doesn’t have to consist of just private individuals. Companies can also be partners in your franchise. This can have a number of tax implications that you and your partners should be aware of.

Limited partnerships
Partnerships of this type are not the same as limited liability partnerships. See later for details on this kind of partnership. Limited partnerships as their name suggests limit the liabilities of each partner in the business to only the amount of money they have invested in the franchise business. Limited partnerships need to register with Companies House [www.companieshouse.gov.uk/about/gbhtml/gb02.shtml] by filling in form LP5.

Limited liability partnerships
For personal finance reasons limited liability partnerships (LLP) are popular, as it enables the individuals within the franchise partnership to limit the personal liability they will have for their partner’s debts. More information is available on the Companies House website: www.companieshouse.gov.uk/about/gbhtml/gbllp1.shtml.

An LLP has a number of unique features including:

• LLP’s must have at least two members. One of these can be a company.
• The responsibilities of partners within an LLP are generally the same as those for an ordinary partnership.
• A designated member of the LLP will be responsible for meeting all the partnership’s legal requirements.
• All LLP’s based in England and Wales must be registered (incorporated) with Companies House. LLP’s in Scotland should contact Companies House in their region.
• The LLP will be issued with a Deed of Partnership. It is a legally binding document that details how the partnership will be run and each partner’s responsibilities.
• The profits from the franchise are shared between partners who are treated as self-employed for tax purposes.
• LLP’s don’t pay corporation tax unless any of the franchise partners are limited companies in which case they will have to pay corporation tax in the usual way.
• If the LLP has turnover of more than £67,000 in any year, the partnership must register for VAT.
• LLP’s with employees will have to collect income tax and National Insurance contributions.

Tax and partnerships

The personal finance of partners when managing their franchise are treated as if they were self-employed individuals. This will mean you will have to register as self-employed with the HMRC and complete self-assessment tax forms each year. More information is available on the HMRC website.

Each year you will have to complete a Partnership Tax Return. This document sets out your partnership’s income and outgoings that can be claimed as legitimate expenses. Consult your accountant if you are unsure about any expenses you want to claim for. It’s a good idea to decide that one partner will be responsible for completing this form. They are called the nominated officer and will be HMRC’s point of contact for tax matters within your partnership.

Remember that even though you have a nominated officer, it is not their responsibility to complete the self-assessment tax returns of each person or company within the partnership. If one partner makes a mistake, the entire partnership will be liable for any penalties.