This fact sheet covers England & Wales. We also have a version for Scotland if you need it.
This fact sheet tells you about how to deal with debts when you run a partnership. A partnership is a business where two or more people carry on business to try and make a profit.
Use this fact sheet to:
- find out whether a partnership exists;
- understand who is liable for a partnership's debts;
- learn how to deal with partnership debts if there is no spare money available; and
- learn how to deal with partnership debts if there is some spare money available.
What is a partnership?
When two or more people carry on a business to try and make a profit, it is known as a partnership. The word ‘firm’ is also used when referring to a partnership. We use both words in this fact sheet.
A partnership must have at least two partners. The partnership is known as the ‘principle’ and the partners as its ‘agents’.
How do I know if a partnership exists?
When deciding whether a partnership exists, the Partnership Act 1890 applies.
Some partnerships are set up on the basis of a partnership agreement signed by all of the partners. A partnership agreement is normally prepared by a solicitor and usually includes information about:
- how the profits and losses should be shared;
- who has the authority to enter into contracts on behalf of the firm;
- whether salaries will be paid;
- how much of the firm’s debts each partner agrees to pay; and
- the circumstances in which the partnership will be dissolved (closed).
What if there is no written partnership agreement?
If there is no written agreement, it can be difficult to know whether a partnership exists. The Partnership Act 1890 states that if more than one person receives a share of the business profits, this is good evidence that the business is a partnership. The way that the business completes its income tax returns is also important. If you are unsure whether your business is a partnership, contact us for advice.
Registering a partnership
When a business partnership is set up, the partnership and each partner must be registered with HM Revenue & Customs (HMRC). There is a deadline of:
- 5 October in the business's second tax year to register the partnership itself; and
- 5 October in the tax year after joining the partnership for a partner to register as a partner.
The tax year runs from 6 April in one year to 5 April the following year. For example, if a partnership was set up in May 2023, the deadline for registering the partnership and the founding partners with HMRC is 5 October 2024. If a new partner joins the partnership in July 2024, they will have a deadline of 5 October 2025 to register with HMRC as a partner.
If your partnership has not already been registered with HMRC, a partner will need to be chosen to be the 'nominated partner'. The nominated partner is responsible for:
- registering the partnership with HMRC;
- keeping business records; and
- submitting the partnership's tax returns.
For further information on how to register a partnership and partners, go to www.gov.uk and search for ‘Set up a business partnership’.
If you have missed a deadline for registering the partnership or registering as a partner, contact us for advice.
The nominated partner for your firm has the responsibility to submit the partnership's tax return to HMRC every year. This return will show:
- the profit that the partnership made during a tax year; and
- how the profits were allocated among the partners.
Each partner in the business will need to submit their own tax return to HMRC. This should use the same profit allocation figure reported on the partnership tax return.
You may want to consider using an accountant or a bookkeeper if you need help with submitting tax returns.
Liability for partnership debts
Creditors will initially ask the firm to pay its own debts. If the firm cannot pay, the creditors are likely to ask the individual partners to pay.
Partners have joint liability for the firm’s debts. This means that each partner is liable for the whole balance of the firm’s debts. However, any payments made towards a firm’s debt will reduce the balance owed by each partner. For example, if a partnership with two partners has a £500 debt to a supplier, ‘partner A’ and ‘partner B’ each owe £500 to the supplier. In this same example, if ‘partner A’ pays the supplier £300, the balance of the debt that ‘partner A’ and ‘partner B’ each owe reduces to £200.
The firm’s creditors can take action against any partner to recover debt, even if there is a partnership agreement that says one partner is responsible for paying debt. Creditors may choose to take action against only one partner or they may take action against more than one partner at the same time. A partner may pay more towards a firm's debt than they had agreed to in a partnership agreement. If this happens, that partner may be able to recover the money that another partner should have paid by taking separate court action against them, if necessary.
All partners have a ‘fiduciary relationship’ with the firm. This means that all their actions must be in the best interests of the firm and the other partners. All partners are liable for the actions individual partners take on behalf of the firm.
Changes in the partnership
A person who joins a partnership will not be liable for the debts it built up before they joined, unless an agreement is made that says something different.
A person who leaves a partnership will still be liable for the firm’s debts that were built up before they left.
A person who leaves a partnership may still be liable for any debts the firm builds up after they leave. However, they will not be liable if:
- they have agreement to this from the creditors and other partners; and
- their name is removed from the firm’s stationery.
If a partner dies or is made bankrupt, any assets that they own will form part of an 'estate'. An estate can include property, money and personal possessions. A partnership may claim a deceased or bankrupt partner's share of the debt from the estate.
Income tax liability
Partners are not jointly liable for income tax. Each partner must pay income tax on their own share of the firm's profits.
A ‘silent partner’ (or ‘sleeping partner’) does not take part in the day-to-day running of the business. However, they are still jointly liable for the firm’s debts and they have the same fiduciary relationship with the firm.
Disputes over liability
Partnership law is complicated. You may need legal advice if:
- you have a dispute over whether you are liable for a partnership debt;
- you want to defend legal proceedings brought against you for a partnership debt; or
- you believe another partner owes you money because you have paid more than your agreed share towards debt.
Contact for us advice on finding a solicitor that can help you.
Dealing with partnership debts
Completing a business budget sheet
If your firm is struggling to pay its debts, consider whether it can negotiate with its creditors and trade through its financial difficulties. To do this, you will need to complete a business budget sheet outlining the firm’s income and outgoings. You may need help from your accountant as you will need to look at the average income for the firm (normally over a period of between the last 3 to 12 months) as well as its outgoings. The firm may also need to budget for value added tax (VAT).
If the firm is making a profit after all its outgoings have been taken into account (a ‘net’ profit), consider whether offers can be made to its creditors. Later in this fact sheet, you can see the debt solutions available, depending on whether or not the firm has a net monthly profit.
Cash flow forecasts and business plans
While a budget sheet uses recent trading figures to show how your business is performing, completing a cash flow forecast and writing a business plan can help towards ensuring the future sustainability and growth of your business.
If your partnership applies for credit, a cash flow forecast and business plan can also help potential lenders to work out whether any new lending is viable.
What is a cash flow forecast?
A cash flow forecast allows you to estimate your firm’s future income and outgoings for a specific period, for example over the next 12 months. You can use this to see if there are any periods where your business may experience financial difficulty and then look at ways to compensate for this. For example, a firm’s cashflow forecast may show that there are periods where more money is going out than coming in when stock is purchased. The firm could try to plan for this by negotiating new payment terms with the supplier that allow it to spread the cost of buying stock over a longer period.
For a cash flow template, go to www.startuploans.co.uk/cash-flow-forecast-template.
What is a business plan?
A business plan is a written document that describes your firm’s business goals and strategies for achieving them. It can be used to help you to track how business is progressing and to consider how to reduce any potential risks to the firm.
For an example template and more information on how to write a business plan, go to www.gov.uk/write-business-plan.
Net monthly profit available
Use your business budget to show how much money is available and how much the firm can offer to its creditors. Business Debtline can help you to complete a partnership budget sheet. Contact us for advice.
Consider which debts are priority and which are non-priority. Priority creditors have stronger powers to get their money back. If you are unsure of the type of debt your firm has, contact us for advice.
Partnership voluntary arrangement
A partnership voluntary arrangement (PVA) is a formal arrangement with the firm’s creditors to pay an agreed amount off its debts.
Payment through a PVA can be made in a lump sum or in instalments. A common type of PVA is for the partnership to make a fixed monthly payment over a period of three to five years.
During a PVA, creditors cannot add interest and charges or take recovery action for a debt that is included in the PVA. When the arrangement is completed, the firm’s liability for the unpaid part of debt included in the PVA is written off.
Some creditors are not bound by the terms of the PVA without their consent. This includes secured creditors and landlords, who may still take possession proceedings for outstanding debts. Some creditors have a ‘preferential status’, for example HMRC for VAT debt and employees that are owed wages. Preferential creditors can be included in a PVA, but they must be paid in full under the terms of the PVA unless they agree to receive less than they are owed. Contact us for advice if you are not sure whether your firm’s debts can be included in a PVA.
Setting up a PVA
Your firm would need the help of an insolvency practitioner (IP) to set up a PVA. An IP is usually an accountant or solicitor who is authorised to set up formal insolvency procedures. There will be fees involved in setting up a PVA. Shop around to find a reputable IP. Check the terms and conditions of their services and fees before agreeing to anything. To find a directory of insolvency practitioners, see www.gov.uk and search for ‘Find an insolvency practitioner’.
The process for setting up a PVA involves an IP making a proposal to creditors on your firm’s behalf. Creditors are invited to vote on whether they accept the PVA proposal. The proposal needs to be accepted by at least 75% ‘by value’ of the voting creditors for it to become legally binding on all the creditors included in the PVA. ‘By value’ means voting creditors who hold at least 75% of the total debt, not the number of creditors you have.
Credit reference file
A PVA is marked on your credit reference file for six years. If your partnership relies on credit to trade, entering into a PVA may make it difficult to continue trading.
Personal liability not written off in a PVA
Normally, a PVA will be set up so that only a percentage of the debts included in the arrangement are paid back. When a PVA has completed, the individual partners will remain liable for any unpaid part of the debts that were included in the PVA and can be asked to pay them. As a way of dealing with their personal liability, it is common for each partner to also enter into an individual voluntary arrangement (IVA) to run alongside the PVA. For more information on IVAs, see our Individual voluntary arrangements fact sheet.
No net monthly profit available
Ceasing to trade
If a firm is insolvent, it means that:
- it cannot pay its debts as they fall due; or
- the value of its assets is less than the total debt that it owes.
Ask your accountant for help with drawing up a balance sheet of the firm’s assets and debts.
A firm will also be considered as insolvent if it has received a ‘statutory demand’ and the time limit stated has run out. A statutory demand is a formal demand for money that may be sent by creditors when collecting a debt.
If you are unsure whether your firm is insolvent, contact us for advice.
If you think that your firm is insolvent, you may need to consider ceasing to trade. If you do decide to cease trading, take the following actions.
- Inform HM Revenue and Customs (HMRC) for income tax purposes. You will need to complete a final tax return. This cannot normally be done until the 5 April after the date the firm ceases trading. If you have an arrangement in place to pay your income tax, tell HMRC about this when you inform them that you have ceased trading. This is because you may not be able to continue making the agreed payments. If necessary, renegotiate your payments based on your new circumstances. It is usually easier to negotiate an arrangement to repay income tax after you have ceased trading. Contact us for advice.
- If you are registered for VAT, you also need to inform the VAT department at HMRC that you have ceased trading. You will need to ‘de-register’ for VAT and complete a final return. It is usually easier to negotiate an arrangement to repay VAT after you have ceased trading. Contact us for advice.
If you cannot pay your accountant to complete your final accounts, contact us for advice.
If the partnership still has debts after it ceases trading, you will still be liable to pay the debts. Contact us for advice on how you may be able to deal with these debts. You can also see our Ways to clear your debt fact sheet for more information.
If you are on a low income and you need further help with personal tax issues, contact TaxAid. TaxAid is an independent charity. See Useful contacts at the end of this fact sheet.
See our Income tax debt fact sheet for more information.
Bankruptcy may be a good solution for you if you are not able to repay your debt and you have little or no assets. Most debts are included in bankruptcy and are written off when bankruptcy ends. Any valuable assets that you own can be sold to raise money to pay your creditors.
If all the partners in your firm are in agreement about ending the business partnership, you may be able to consider applying for a partnership bankruptcy. This involves all partners making a joint application to court to be made bankrupt. If the court agrees to make a bankruptcy order for all of the partners, an ‘official receiver’ will be appointed to deal with the bankruptcy. The official receiver will also be allowed to wind up the partnership business, which will involve:
- selling any business assets;
- collecting money owed to the partnership;
- closing the business; and
- distributing any funds to the firm’s creditors.
If the business has already ceased trading, you may still apply for a partnership bankruptcy if the business traded in the three years before the date that you apply to the court.
The process for applying for a partnership bankruptcy is different to applying for an individual bankruptcy. If all of the partners in your firm want to apply for bankruptcy, the fee will be lower than the total fee if you all apply separately for your own bankruptcy. Contact us for advice on how to apply for partnership bankruptcy. You can also find more information on www.gov.uk, search for ‘how to wind up an insolvent partnership’.
A partnership bankruptcy will affect you as an individual as it does involve a bankruptcy order being made against you personally. For information on bankruptcy and how it can affect you, see our Bankruptcy fact sheet.
Applying for your own bankruptcy only
If bankruptcy is not suitable for the other partners in your firm, you can apply for your own bankruptcy. If you are made bankrupt, any outstanding business debts will still be owed by the partners in the firm who have not become bankrupt and assets owned by the partnership could also be at risk. If there is no partnership agreement specifying what happens in the event of one partner going bankrupt, the partnership will usually have to be closed.