If you are starting a business with someone else, or already run a partnership and are wondering whether a company would suit you better, the choice affects how much tax you pay, how much risk you carry and how much paperwork you take on. This guide compares the two. If you are weighing up working alone as well, see sole trader vs partnership or our wider guide to choosing a structure.

The short version

A partnership is two or more people running a business together, and the profit passes straight through to them. A limited company is a separate legal entity that owns the business, pays its own tax on its profits, and is owned by its shareholders. The company gives you more protection and more flexibility, but it also brings more rules, more filing and a public record at Companies House.

Liability and protection

In a partnership, each partner is personally liable for the debts of the business, including debts taken on by another partner acting for it. A limited company stands on its own: it owns the assets and owes the debts, and a shareholder's liability is normally limited to the amount they agreed to pay for their shares.

That protection has limits. Lenders often ask directors for personal guarantees, and directors have legal duties of their own, so it is not a shield against everything. There is also a middle option, a limited liability partnership (LLP), which gives members limited liability but is taxed like a partnership. It has to file accounts at Companies House, so it brings some of the same formality as a company.

How the profit is taxed

Partners are taxed personally on their share of the partnership's profit as it arises, whether or not they take it out, through Income Tax and Class 4 National Insurance.

A limited company pays Corporation Tax on its profit. The people behind it are then taxed separately on whatever they take out as salary or dividends, and money left in the company is not taxed on them personally until it is withdrawn. That second layer is why a company can be more tax-efficient at some profit levels and less at others. Rates and allowances change from year to year, and the answer depends on how much the business makes and how much you need to take home, so it is worth working through with real figures rather than relying on a rule of thumb.

Taking money out of the business

Partners draw money from the partnership as they need it, and tax is based on profit, not on drawings. In a company, you normally take money as a salary, which runs through payroll, and as dividends, which can only be paid from profits that are left after tax. Money taken out in other ways is usually treated as a director's loan, which has its own tax rules. We explain these in our pay guide and in our article on director's loans.

Paperwork, filing and privacy

A partnership files a partnership return and each partner files their own personal return. Its accounts are not put on a public register.

A company has more to do. It prepares statutory accounts, files a Corporation Tax return, submits a confirmation statement at least once a year, and keeps its details up to date at Companies House. Information about its directors and shareholders, and usually a version of its accounts, is available to the public, and directors now have to verify their identity. Any payroll for directors and staff adds to the workload. None of this is difficult with support, but it is a real step up from running a partnership.

Bringing people in, raising money and credibility

A company makes it easier to bring in new owners or investors, because you can issue shares rather than rewrite a partnership agreement. Some customers, lenders and larger contracts prefer to deal with a company, though many partnerships trade successfully without one. If you expect to grow, take on investors or eventually sell the business, a company is often the more practical structure.

Moving from a partnership to a company

It is common for a partnership to become a limited company once profits, risk or ambition grow. The move has tax and legal consequences, such as how the business assets are transferred, any VAT and capital gains position, and how the partners' agreement carries over into a shareholders' agreement. It is worth planning in advance rather than switching on a whim, and we help clients through it regularly.

Is a limited company always more tax-efficient?

No. At lower profits, a partnership can be simpler and cost less overall. At higher profits, a company can allow you to keep more in the business and control when you pay personal tax. Where the line falls depends on your profit, your other income and your plans for the next few years, so the sensible approach is to model both options with your numbers.

What is an LLP?

A limited liability partnership is a separate legal entity, like a company, but its members are taxed like partners. It suits some professional and family businesses. It is more formal than an ordinary partnership and files accounts publicly, so it is worth comparing all three before deciding.

Deciding between a partnership and a company?

Talk to us about your business structure →