"A4G have designed viable solutions to overcome all of these problems, while still allowing you to benefit from the many advantages of trading as a partnership."
What are the implications of trading through a partnership?
Some of the problems of trading as a partnership to consider are:
As a self employed individual you are personally liable for the debts of the business. Were the business to fail for any reason you could be required to sell your personal assets, such as your car or home, in order to meet any unpaid debts. There is a particular risk in the situation where the business is successfully sued for any reason, as the cost of this can be extremely high and the profitability of the business does not affect the amount that can fall due. Additionally, you may be required to cover the debts that other partners within the business have incurred.
Limited Companies are in most cases more tax efficient than trading as a partnership, and you are likely to be able to benefit from tax savings on an annual profit of over £15,000. One of the reasons for this is that you are able to avoid the need to pay National Insurance contributions by trading through a Limited Company, but are still entitled to state benefits. With the rate of corporation tax falling in 2011, trading as a Limited Company has become even more attractive.
Taxed on retained profits
Current tax rules mean that you are being taxed on all the profits earned by the business during its accounting period. However, you may decide to leave some of this profit within the business to finance its day to day running or to provide for any future expenditure. As a partnership you will be required to pay the same level of tax regardless of whether you take all of your profits or not.
Payments on account
HM Revenue & Customs require you to make payments in advance towards your tax liability for the following year, which is paid in two instalments with each instalment being 50% of the tax due for the prior year. This can cause cash flow problems for businesses where income has fallen from that of the previous year, as it can be slow to receive a refund from HM Revenue & Customs if your payments on account have already been paid.
Due to the tax rules in place for new partnerships you could find yourself in a situation where you are taxed twice on some of your income. The income that you have been taxed on twice is recorded on each of your future tax returns and you can obtain relief for this at the point you cease to trade. However, this could be many years in the future and the relief does not take into account the fact that the value of money decreases over time. £1,000 of additional tax paid now could result in you being repaid £1,000 in 30 years time!
Viable solutions have been designed to overcome all of these problems, while still allowing you to benefit from the many advantages of trading as a partnership.
It is vital for any partnership to have a legal partnership agreement in place and to keep this up to date. This ensures all partners are aware of and in agreement of their rights and responsibilities and can avoid lengthy, costly disputes in the future. Although you may believe it isn't necessary it is all too common to find a business in crisis if partners fall into dispute, become critically ill or pass away.
You may not be aware that if no partnership agreement is in place then your business is automatically bound by the Partnership Act 1890. This has some very unfavourable terms within it, such as stipulating how profits must be shared and that all partners are equally liable for any liabilities of the business. The only way to avoid this is to have a legally binding partnership agreement.
We work closely with our legal associates who can prepare legal partnership agreements to meet your requirements.
It is common to find businesses in financial difficulty following the serious illness or death of a partner. The partner is likely to be a key person within the business, without whom the business will suffer a loss of income. However, you may have incurred costs such as staff wages that must be paid irrespective of the situation. Ensuring you have sufficient cover in place to compensate the business should allow it time to overcome the situation and continue on into the future.
Along with our independent financial advisor associates, we can help you identify any needs for insurance cover to ensure your business and your family are fully protected.
To speak to one of our team of specialist accountants and advisers call us on (01474) 853 856 or view the relevant links on this page for further information.