Types of Partnership

Partnership Types

There are 3 different Partnership Types, which can suit differing business scenarios:

  1. General Partnership Act 1890 (GP)
  2. Limited Partnership Act 1907(LP)
  3. Limited Liability Partnership Act 2000 (LLP)

Other areas covered are:

  1. LLP Disguised Employees Conditions
  2. Mixed Partnership – HMRC Manual PM 210000
  3. Types of Partners
  4. Partnerships used to charge Limited Companies

There is another type of partnership for tax purposes known as a mixed partnership.  These are when there are non-individual members (typically companies).

Type Limited Liability Tax Compliance
GP No Income Tax, Class 2 NI & Class 4 NI Tax Return
LP Partially Income Tax, Class 2 NI & Class 4 NI Tax Return & Limited Companies House information
LLP Yes Income Tax, Class 2 NI & Class 4 NI Tax Return & Statutory duties and filings to Companies House
Partnership – HMRC Manual PM 131200

An ordinary or ‘general’ partnership does not have a specific title, they are just partnerships.

They must have 2 members which are carrying on a business in common with a view of profit’ (PA 1890, s. 1(1)). The important point here is that the partnership legislation specifically states that a particular relationship between the parties constitutes a partnership for general UK legal purposes.

All partnerships must complete a Partnership Return and all members of the partnership must complete their own Self-Assessment Tax Returns using the information contained with the Partnership Return.

Limited Partnership – HMRC Manual PM 131310

A limited partnership must register with Companies House otherwise it deprives it of its limited liability.

There must be 2 partners of which at least 1 partner must have unlimited liability.  The other partners are limited to their capital contribution.

The general partner is the one that manages the business and is liable to the creditors.  The limited partners must contribute a specified sum (usually a nominal sum e.g. £10) on joining the firm, which they cannot withdraw as long as they remain a limited partner

The limited partner may not:

  • bind the firm and
  • take part in the management of the firm’s business, even if they do not agree with the management decisions.  If they do, they lose their limited liability.

Limited partners, in the same way as other partners in the partnership are taxed on their share of the profit from a trade or profession carried on by the partnership as if it were derived from a ‘notional’ trade or profession that they carry on alone.

A limited partner is not entitled to relief for interest on money borrowed to introduce into the business.


The British Venture Capital Association has agreed guidelines on the use of limited partnerships as vehicles for investment in the UK. These guidelines are to be found at CTM36580.

Limited Liability Partnership – HMRC Manual PM 131410

Limited Liability Partnerships (LLP) are “bodies corporate” with legal personality separate from their members, except where provided for in the legislation.  LLP’s do not follow partnership law and a regulated under a number of provisions of the Companies Act 2006.

An LLP can be formed by two or more persons who are carrying on a partnership type business. The LLP has to be registered at Companies House.

LLPs like partnerships are governed by the agreement between the members.  There are default positions set out in the LLP regulations, but these are generally over-ridden by the agreement between the members.

Limited Liability Partnership Tax Issues

With partners of an LLP benefitting from the self-employed income tax rates meant that a growing number of firms were promoting an increasing number of employees as partners.  This was a form of tax avoidance, as the firms would avoid employers national insurance that they would have incurred by employing these persons. This saw the introduction of additional tax compliance issues with LLPs regarding “disguised employees”.

These rules only apply to individuals that are members of LLPs.  If a person satisfies all three conditions, then the tax treatment for that person is as if they were an employee of the partnership.  Although their wider legal status as a member of the LLP does not change.

LLP Disguised Employees Conditions

Condition A at least 80% of the total amount payable by the LLP in respect of the individual’s performance for their performance of services will be a disguised salary.

An amount will be treated as ‘disguised salary’ if it:

(a)is fixed;

(b)is variable, but is varied without reference to the overall amount of the profits or losses of the LLP; or

(c)is not, in practice, affected by the overall amount of those profits or losses.

In many cases, this will not lead to any difficulties as partners in an LLP will be remunerated by reference to the overall profits available.

Condition B is that the person concerned does not have significant influence over the affairs of the partnership.

Condition C is that the person’s partnership capital is less than 25% of the amount of reasonable expected disguised salary for the tax year. In other words, the person concerned has to have at stake capital of at least one quarter of their partnership income to avoid satisfying this test. The partnership capital is set at the date of appointment of the partner and subsequently at the beginning of each tax year or whenever the partnership sharing arrangements change.

Even if the salaried member is reclassified as an employee for tax purposes, HMRC’s manuals indicate that they may still be entitled to interest relief on a loan to contribute capital to the LLP.

Mixed Partnership – HMRC Manual PM 210000

A mixed member partnership is a partnership or LLP which has both individual members and non individual members (typically companies but can include trusts or other entities).

The legislation around mixed partnerships are complex.  The avoidance rules are there to stop the use of a corporate partner controlled by an individual partner to divert profits to be liable to corporation tax rather than the higher income tax rates.  This also works in reverse for losses.

Where the individual and non-individual partners are genuinely acting at arm’s length and not intending to secure a tax advantage the legislation does not apply.

The rules are within ITTOIA 2005 and start from s.849.

Types of Partners

The types of partners are:

  • Equity Partner – a partner who is fully entitled/liable to share in the profits and losses in the business, respectively.
  • Salaried Partner – can have a couple of meanings.
    1. Someone who is held out as a partner but remunerated solely by a fixed salary which is deducted against profits.
    2. A partner who is entitled to a fixed or guaranteed share of profits.

Where the individual does not contribute any capital to, or have any proprietorial interest in, the business, they will probably be taxable as an employee; in other words, not as a partner at all as far as tax is concerned.

  • Sleeping Partner – a term used to describe a partner who is entitled to a share of profits by virtue of contributing capital to the business but who plays no active part in the running of that business.  There are specific tax rules with regards to sideways loss relief for these non-active partners.
  • Limited Partner – a partner whose liability for the partnership debts is limited to the amount of his capital contribution. He or she will be a member of a limited partnership incorporated under the Limited Partnership Act 1907.
Partnerships used to charge Limited Companies

There are a couple of instances where a partnership can charge a company for service, where the director is also a partner within the partnership.  The HMRC manuals set out these circumstances:


In addition to this article please visit our other Partnership page. With tax it is always advisable if possible to obtain advise before making a decision.  If you require assistance with making the necessary declarations and/or calculations please contact us.

Leave a Comment