When you’re running a business as a partnership, financial planning can get a bit more complex than with sole traders or limited companies. You’re not just managing your finances anymore – everything needs to be split between two (or more) people, which brings challenges. From shared profits to tax liabilities, you need to ensure everything is clear and agreed upon to avoid any headaches down the line.
Let’s walk through the key areas you should be thinking about to keep things smooth and efficient.
Understanding shared responsibilities
In a partnership, financial responsibilities are shared between all partners. This includes everything from profits to tax liabilities. Unlike limited companies, where you might have limited liability protection, partnerships are typically governed by joint and several liability. If one partner can’t cover their share of a debt, the other partners will have to step in and cover it.
This is why having a clear agreement from the outset is so important. It’s crucial to outline how profits and liabilities will be divided, what each partner is responsible for, and what happens if one partner wants to leave. It’s easy to assume things will always go smoothly, but businesses can hit bumps, and without a solid agreement in place, disputes over money can cause serious issues.
Tax planning for partnerships
Regarding tax, partnerships are a little different from limited companies. For starters, the partnership itself doesn’t pay tax on profits – instead, the profits are distributed between the partners, who then pay tax on their share via self-assessment.
For the 2024/25 tax year, personal allowances remain at £12,570, meaning partners won’t pay any tax on the first £12,570 of their profits. However, anything above that will be taxed at the standard rates, starting with 20% on earnings up to £50,270 and 40% on earnings between £50,271 and £125,140. If your earnings exceed £125,140, you’ll be taxed at the higher rate of 45%.
It’s important to plan carefully to ensure each partner can manage their tax responsibilities efficiently. Using allowances, such as the £1,000 trading allowance or pension contributions to reduce taxable income, can make a real difference to your tax bill. And don’t forget about national insurance contributions (NICs), payable by partners as self-employed individuals. For the 2024/25 tax year, Class 2 NICs are compulsory if profits are £6,725 or more, with a weekly rate of £3.45. If profits are below £6,725, paying Class 2 NICs is optional but can help maintain eligibility for certain state benefits. Meanwhile, Class 4 NICs, charged at 6% on profits between £12,570 and £50,270, will still apply.
As announced in the recent Autumn Budget, some changes are on the way. The government will increase the Lower Earnings Limit (LEL) and the Small Profits Threshold (SPT) by the September 2024 CPI rate of 1.7% from 2025/26. For those paying voluntarily, the government will also increase Class 2 and Class 3 NICs rates by September CPI of 1.7% in 2025/26. The LEL will be £6,500 per annum (£125 per week) and the SPT will be £6,845 per annum. The main Class 2 rate will be £3.50 per week, and the Class 3 rate will be £17.75 per week.
Managing shared profits and assets
Managing shared profits and assets is one of the trickiest parts of running a partnership. You’ll need to agree upfront on how partners will divide profits. While it’s common for profits to be split equally, this doesn’t have to be the case. If one partner brings more capital into the business or takes on more responsibility, you might agree to an uneven split. But whatever you decide, make sure it’s formalised in your partnership agreement.
Shared assets, like property or equipment, should also be accounted for. Are they owned jointly by all partners, or does one partner retain ownership? Again, this should be included in your agreement to avoid any confusion.
Risk management
Running any business comes with risks, but those risks are shared in a partnership. And because partnerships operate under joint and several liability, all partners are responsible for the actions of the others. This can be a major risk if one partner takes on personal debt or makes financial decisions that affect the entire partnership.
It’s worth taking some time to put risk management measures in place. This might include setting financial limits on spending, requiring joint approval for major decisions, or ensuring that each partner understands their financial responsibilities.
You should also consider taking out insurance to cover potential risks, such as professional indemnity insurance, which could help protect your partnership if something goes wrong.
The importance of a solid partnership agreement
We’ve mentioned it a few times already, but it’s worth repeating—having a solid partnership agreement is key to a successful business partnership. Without one, you rely on verbal agreements, which can quickly lead to disagreements if things go south.
Your partnership agreement should cover everything from how profits will be divided to what happens if a partner wants to leave. It should also set out each partner’s responsibilities and how decisions will be made. It’s a good idea to review your agreement regularly and make sure it’s still fit for purpose as your business grows.
Planning for the future
Financial planning isn’t just about managing the here and now – it’s also about planning for the future. As a partnership, you’ll need to consider what will happen if one partner wants to leave the business, retires, or dies.
If you don’t have a clear succession plan, this can cause major issues for the remaining partners. Your partnership agreement should outline what will happen in these situations, and it’s worth considering things like key person insurance to protect your business in case of a partner’s death.
Bringing it all together
Partnerships can be a great way to run a business, but they come with their own challenges regarding financial planning. By ensuring you’ve got a clear agreement in place, managing tax responsibilities, and planning for the future, you can help ensure your partnership runs smoothly.
At Blue Shore, we’re here to help you with these financial challenges. Whether it’s managing shared assets, planning for tax, or putting together a risk management strategy, we’ve got this.
Get in touch with us today to see how we can help you.
