A general partnership is a business structure where two or more people carry on a business together with a view to profit. Each partner shares the profits, losses and management of the business. Unlike a private limited company, a general partnership is not a separate legal entity — the partners are personally liable for the business’s debts.
Key Features
| Feature | Detail |
|---|---|
| Legal status | Not a separate legal entity (in England and Wales) |
| Minimum partners | 2 |
| Maximum partners | No legal maximum |
| Liability | Unlimited — each partner is personally liable for all debts of the partnership |
| Formation | Automatic when two or more people carry on business together |
| Registration | Not required at Companies House (but must register with HMRC) |
| Governing law | Partnership Act 1890 (unless a partnership agreement overrides default rules) |
Formation
A general partnership comes into existence automatically when two or more people start trading together. There is no requirement to:
- Register at Companies House
- File formation documents
- Have a minimum capital contribution
However, the partnership must register with HMRC for Self Assessment, and each partner must register individually for income tax.
Business Name
If the partnership trades under a name other than the partners’ surnames, it must comply with the Business Names Act 1985 (now part of the Companies Act 2006, Part 41):
- Display the partners’ names and an address at the business premises
- Include the partners’ names on business letters and order forms
- Certain words (e.g. “Royal”, “British”, “Authority”) require permission to use
Partnership Agreement
While not legally required, a partnership agreement is strongly recommended. Without one, the Partnership Act 1890 default rules apply, which may not suit the partners’ intentions.
Default Rules Under the Partnership Act 1890
| Matter | Default Rule |
|---|---|
| Profit and loss sharing | Equal shares, regardless of capital contributed |
| Capital contribution | No interest paid on capital; no obligation to contribute more |
| Management | Every partner has equal right to manage the business |
| New partners | Require unanimous consent |
| Drawings | No partner entitled to salary or remuneration |
| Dissolution | Any partner can dissolve the partnership by giving notice |
| Expulsion | No power to expel a partner (unless agreed) |
What a Partnership Agreement Should Cover
- Profit and loss sharing ratios (may differ from equal splits)
- Capital contributions and interest on capital
- Partner drawings and salaries
- Decision-making procedures (unanimous or majority)
- Admission of new partners
- Retirement and expulsion provisions
- Dispute resolution mechanisms
- Non-compete and confidentiality clauses
- Dissolution triggers and procedures
Unlimited Liability
The most significant characteristic of a general partnership is unlimited liability:
- Each partner is jointly and severally liable for all debts of the partnership
- A creditor can pursue any individual partner for the full amount owed, even if that partner had nothing to do with the debt
- Partners’ personal assets (house, savings, car) are at risk
- Liability extends to debts incurred by any partner acting within their authority
This contrasts with a limited liability partnership, where partners’ liability is limited to their capital contribution.
Taxation
A general partnership is tax-transparent — the partnership itself does not pay tax. Instead, each partner pays income tax on their share of the profits:
Partnership Tax Return
- The nominated partner must file a partnership tax return (form SA800) with HMRC
- The return shows the total partnership income and how it is allocated among partners
- Each partner then includes their share on their personal Self Assessment tax return (form SA100)
Individual Partner Taxation
| Tax | How It Applies |
|---|---|
| Income tax | Each partner’s share is taxed at their marginal rate (20% / 40% / 45%) |
| National Insurance | Class 4 on each partner’s profit share; Class 2 is voluntary since 6 April 2024 |
| Capital gains tax | Charged individually on disposal of partnership assets |
Tax Advantages and Disadvantages
| Factor | Partnership | Limited Company |
|---|---|---|
| Tax on profits | Income tax at marginal rate | Corporation tax at 25% (or 19% small profits rate) |
| Extracting profits | Automatic — profits belong to partners | Requires salary or dividends |
| NIC | Class 4 on profits | Employer + employee Class 1 on salary only |
| Loss relief | Can offset against personal income | Limited company loss rules apply |
Partner Duties
Each partner owes fiduciary duties to the other partners, including:
- Duty of good faith — act honestly in all partnership dealings
- Duty to account — disclose all profits from partnership activities
- Duty not to compete — not to carry on a competing business without consent
- Duty of disclosure — share all information relevant to the partnership
These duties exist by default under the Partnership Act 1890 and are similar to (but separate from) the director duties that apply in limited companies.
Partnership Accounting
Partnerships must maintain proper accounting records. Key accounting features include:
Capital Accounts
Each partner has a capital account recording:
- Initial and subsequent capital contributions
- Share of profits or losses
- Drawings (money withdrawn from the business)
- Interest on capital (if agreed)
Profit Allocation
At the end of each accounting period, the partnership profit is allocated to partners according to the partnership agreement (or equally if no agreement exists):
| Step | Detail |
|---|---|
| 1 | Calculate net profit |
| 2 | Deduct partner salaries (if agreed) |
| 3 | Deduct interest on capital (if agreed) |
| 4 | Allocate remaining profit in the agreed ratio |
Financial Statements
Partnerships prepare:
- Profit and loss account — showing income, expenses and net profit
- Balance sheet — showing assets, liabilities and partners’ capital
- Partner appropriation account — showing how profit is divided
- Current accounts — tracking drawings and profit allocations for each partner
Partnership vs Other Structures
| Feature | General Partnership | Limited Company | Sole Trader |
|---|---|---|---|
| Liability | Unlimited (joint and several) | Limited to share capital | Unlimited (personal) |
| Taxation | Partners taxed individually | Corporation tax on profits | Individual income tax |
| Formation | Automatic | Registration at Companies House | Automatic |
| Regulation | Partnership Act 1890 | Companies Act 2006 | Minimal |
| Number of owners | 2+ | 1+ (shareholders) | 1 |
Dissolving a Partnership
A general partnership can be dissolved by:
- Agreement — as set out in the partnership agreement
- Notice — any partner giving notice to the others (under the Partnership Act 1890)
- Death or bankruptcy of a partner (unless the agreement provides otherwise)
- Court order — if continuing the partnership would be unjust
- Illegality — if the partnership’s activities become unlawful
On dissolution, the partnership’s assets are used to pay debts, and any surplus is divided among the partners according to their entitlements.