Is a partnership the right option for medical professionals?

Drawbacks of a partnership

• Unlimited liability: Partners are jointly and severally liable for the partnership's debts and obligations. This means they can be personally sued or have their assets seized by creditors. Additionally, partners are liable for the actions and mistakes of other partners unless they are part of a limited liability partnership (LLP).
• Conflict and risk: Partnerships can be prone to disagreements and disputes over management, direction and division of the business. They can also be affected by the personal circumstances of partners, such as death, bankruptcy or withdrawal.
• Lack of continuity: Partnerships don’t have a separate legal identity, meaning they don’t have perpetual succession. The partnership can be dissolved by the exit or death of a partner unless a partnership agreement provides for the business's continuation.

How does associated companies tax legislation affect corporate members?

Corporate members, or companies that are partners in a partnership, are subject to corporation tax on their share of partnership profits. They must also comply with associated companies tax legislation, which aims to prevent tax avoidance by limiting the amount of profits allocated to lower tax rate companies within a group.

Under this legislation, two companies are considered associated if one controls the other or if both are under the control of the same person or persons. Control typically means having more than 50% of the voting power, share capital, or rights to income or assets. This definition is broad, including direct and indirect control through subsidiaries or partnerships. Control can also be determined by considering shares owned by associates, such as family members or business partners.

Economic and organisational interdependence should also be considered along with substantial commercial interdependence. This occurs where once company gives financial support, directly or indirectly, to the other or where each company has a financial interest in the affairs of the same business. If these are present, then companies may be deemed to be associated.

The legislation affects the calculation of corporation tax rates and small profits rates for corporate members. The thresholds for these rates are divided by the number of associated companies, including the corporate member itself. Therefore, the more associated companies a corporate member has, the lower the thresholds and the higher the tax rate.

Need help?

Partnerships offer flexibility and tax advantages by pooling resources and expertise, making them an attractive option for medical professionals. However, they also come with significant risks, such as unlimited liability and potential conflicts. Corporate members must also navigate complex tax legislation that can impact their tax rates.

Therefore, before forming or joining a partnership, seek professional advice. Get in touch with our medical accounting team on 0330 024 0888 or email enquiry@larking-gowen.co.uk.

George Crowe