There comes a time in every builder’s life when he or she thinks about expanding. This can happen in a number of self employed trades – you get to the stage where finding someone whose skills complement your own can take your work to the next level. There are real benefits to forming a business partnership, and you don’t even have to tell Companies House that you have become a sole trader plus one – if you form what’s called a “traditional partnership”, you get the good stuff that comes from broadening your employment horizons without the extra responsibility of owning an official Company. Your self employed partner and you continue to operate as individuals, for tax purposes, but your combined operation can open new avenues you couldn’t have explored on your own.
What’s the difference between a Company and a partnership?
The basic difference between forming a Company (which involves registering at Companies House, as noted above; nominating a Managing Director; and putting a Board together) and becoming a partnership is one of protection. A Company (it’s usually called a Limited Liability Company or LLC) is a legally separate entity from the people who own it. That means if you run into trouble, your own assets, including your home) are immune from your creditors. A partnership, on the other hand, is a business entity where two or more sole traders pull together to generate more work, or to make their existing work more efficient. When you’re a partnership, your self employed partner and you are still liable if anything goes wrong.
So if I’m still liable, what’s the benefit?
Builders tend to have different skills. You might be a carpenter by trade, and your partner may be a mason. When a carpenter and a mason work together as a partnership, they’re able to sell a full service to clients who want refurbishment and new build work done. Also, you don’t have to have just one self employed partner – you can have as many as you want. So you could get together with a painter and decorator; a plasterer; and an electrician as well. In theory, a whole group of self employed builders could create a partnership that covers every aspect of the trade. That means you can bid for big jobs together, or any one of you can do the bulk of a job but pull others in where their individual skills are needed.
How does the money work?
A self employed partner is still responsible for his or her own tax affairs – and could theoretically be responsible for invoicing individual bits of the job as well. In practice, if you’re acting as a single unit in the customer’s eyes you’ll want to give him or her a single bill. But as long as everyone in the partnership is honest, you’ll know how to split the payment out properly between yourselves. In terms of your accounts, each member of the partnership keeps his or her own books, and declares only the money he or she has actually earned.
Are there tax benefits to forming a partnership?
The main benefit to forming a partnership is the sharing of skills, and the ability to sell an improved service to your clients. That said, there can be tax benefits in situations where the partnership presents a unified bill to the client. As long as everyone involved is careful not to declare earnings that have already been declared by someone else, it’s possible to balance out the money you make over the year and mitigate individual tax bills, by sharing the partnership’s money equally. If one of you earns significantly more than the others, this may help them stay in a lower tax band.