Forming a partnership: what you need to know

Starting a business with someone you trust can be incredibly rewarding, but before you dive in, it’s essential to understand what forming a partnership really involves.

While setting up a partnership is often seen as a straightforward process, it carries significant legal and financial responsibilities. Whether you're teaming up with a friend, colleague, or investor, having the right structure and safeguards in place is crucial for long-term success.

Here’s what you need to know before you shake hands...

What is a partnership?

In simple terms, a partnership is a business arrangement where two or more people agree to run a business together and share the profits, responsibilities, and risks.

Unlike limited companies, partnerships are generally easier to set up, but they also mean that each partner may be personally liable for the debts and obligations of the business (unless it’s a limited liability structure, which we’re not covering here).

Do you need a partnership agreement?

Legally? No. Practically? 100% yes.

A partnership agreement is a legal document that sets out the terms of your business relationship - think of it as a safety net. It outlines how your business will run, what each partner is responsible for, and what happens if things go wrong.

Without a written agreement, your partnership will default to the rules set out in the Partnership Act 1890, which may not reflect your intentions or protect your interests.

What should a partnership agreement cover?

A well-drafted agreement gives clarity and structure to your business. It should include:

• Roles & responsibilities - Who does what? Is one partner managing day-to-day while another focuses on sales?

• Profit and loss sharing - How are earnings divided? Equally? Based on investment or workload?

• Decision-making - Do all partners get a say? Who has the final call?

• Dispute resolution - What happens if you don’t agree? Is there a mediation process?

• Exit strategies - If a partner wants to leave, retires, or passes away, what happens?

• Capital contributions -Who’s putting in money, equipment, or assets? And what do they get in return?

  
  

Registering your partnership

To get started, you’ll need to:

• Register with HMRC as self-employed (each partner must do this)

• Submit a Partnership Tax Return annually

• Ensure all partners submit individual Self Assessment tax returns

  
  

(If you choose to structure your partnership as an LLP, a more formal option, you’d also register with Companies House.)

Legal and financial responsibilities

Each partner is generally personally responsible for business debts and liabilities, not just their own share. That’s why trust, transparency, and clear communication are so important.

You’ll also need to keep proper financial records, manage tax obligations, and ensure you’re complying with any industry-specific regulations.

Key benefits of a partnership

• Shared workload and skills

• Simple and low-cost to set up

• Flexible structure - easier to manage than a company in some cases, but…

Things to watch out for

• Joint liability - You’re all responsible if the business can’t pay its debts

• Potential for conflict - Especially without clear roles or agreements

• Lack of structure - Informal partnerships can lead to confusion or disputes

Final thoughts

Partnerships can be a great way to grow a business, but only when built on a solid foundation. Take the time to discuss roles, responsibilities, money, and long-term plans before you launch. And please, don’t skip the partnership agreement. It could save your business (and your relationship) down the line.

Thinking of starting a partnership or need help with partnership taxes? Mystyle Finance is an accounting firm based in East Sussex, but we work with people all over the UK. Contact us to book a free, no-obligation consultation here.