Difference Between Partnership and Limited Company (UK Guide)

When starting a business in the UK, you have to decide how you want to structure it. The most common options (besides remaining a sole trader) are partnerships and limited companies. While both allow you to run a business with others, the ways in which they are structured are very different.

The ways in which partnerships and limited companies are structured differ, and this affects things like how much you are personally liable for, how much tax you will pay, and how much administrative work you will have to do every year. This information is important to consider when thinking about setting up a new business, or when thinking about how to structure an existing business that you have, so I have tried to explain it as clearly as I can here.

What Is a Partnership?

In a partnership, individuals operate a business and share the profits and losses. In the UK, general partnerships are governed by the Partnership Act of 1890. Though rather outdated, this is the law that is currently applicable.

There is no legal distinction between the business and the individuals who run it. As a result, each of the individuals has unlimited liability. If a court judges the business to be personally liable for a debt, the partners' personal savings and property become potentially liable as well.

Most partners create a Partnership Agreement in which they specify how profits will be divided, what will be each partner's responsibility, and what will happen in case a partner wishes to leave the business. While there are no legal consequences for not creating one, failing to do so is a common regret among business owners.

Unlike a partnership, which is liable for income tax, each partner is liable for Income Tax and National Insurance for the profit he/she declares through Self Assessment.

If you are considering opening a partnership in India rather than in the UK, you will find different regulations and a different partnership business process. For this, you can refer to VenturEasy's guide to partnership firm registration in India.

What Is a Limited Company?

A limited company is a distinct legal entity from its owners and managers. After registration with Companies House, a company can contract and be convicted in its own name. It can also own property.

This distinction provides the feature of limited liability. In an insolvency situation, shareholders can only be compelled to contribute more than the value of their shares. Their personal possessions, like their home and other savings, are protected.

A company is managed by directors and owned by shareholders, who can be the same people in small businesses. The company's rules are recorded in the Articles of Association. Instead of completing Self Assessment on the profits, the company pays Corporation Tax and then directors take a mix of salary and dividends.

There is an equivalent structure in India, the Private Limited Company, which has its own registration process under the Ministry of Corporate Affairs, but the processes are otherwise similar to the UK.

Partnership vs Limited Company: Key Differences at a Glance

Which Structure Suits Your Business?

There is no definitive answer, but these questions usually help steer business owners in the right direction:

1. How comfortable are you with risk? If you want to completely separate your personal assets, you would want to go with a limited liability company.
2. How do you see your company expanding? In general, as companies grow, they find it easier to bring in outside investors or share buyers.
3. How much time do you want to spend on administrative tasks? Partnerships tend to have less paperwork compared to companies.
4. How do you want to structure your taxes? If your company is profitable, it is possible that after Corporate Tax is paid, the remaining money could be distributed to the owners as dividends, and it could be less overall compared to if the profit was taxed as personal income.
5. How many people will be running the business? A company can be started by a single person, but a partnership can not be started by fewer than two people.

Latest registration procedures, fees and filing deadlines are available on GOV.UK and Companies House. Do check them out before filing anything.

Some UK business owners look at a middle ground: a Limited Liability Partnership (LLP), which offers a combination of flexibility as a partnership and limited liability. That comparison is worth looking into if neither option above feels like a perfect fit. In case you wish to take the LLP route in India, VenturEasy will handle the registration for you.

Looking to take your UK business to India? Be prepared for different structures and a different registration process. India has its own rules for FEMA and cross-border tax, and its concepts of Private Limited Company, LLP, and OPC within the MCA. If this is part of your plan, VenturEasy can help you set up an Indian subsidiary and register as a foreign company in India, and offer cross-border tax advisory services.

Final Thoughts

There are real differences between partnerships and limited companies. Those differences affect the level of risk you take on personally, how the business is taxed, and how loudly thelimited extent is to which the business can grow. Neither is always better; it depends on the goals of the business, how willing they are to take on administrative work, and how much risk they are personally willing to take on.

If you're trying to make a final decision, it's best to get specific advice. We help business owners in the UK decide on and set up the right business structure from day one.

If you're unsure which structure best fits your business, book a free 15-min consultation with VenturEasy.