Great questions — this is one of the biggest structural decisions a growing business makes, so let me take your points in order.
How the tax compares
In a partnership, each partner is taxed personally on their share of the profits via Self Assessment: Income Tax at 20%, 40% or 45% plus Class 4 National Insurance (6% on profits between £12,570 and £50,270, then 2% above). There is no separate tax on the business itself, and profits are taxed in the year they are earned whether or not you draw the cash.
A company pays Corporation Tax first: currently 19% on profits up to £50,000, 25% on profits above £250,000, with marginal relief smoothing the band in between (see gov.uk/corporation-tax-rates). You are then taxed again on what you extract: salary through PAYE, or dividends at 10.75% (basic rate), 35.75% (higher) or 39.35% (additional) on dividends above the £500 dividend allowance in 2026/27. The classic small-salary-plus-dividends route still tends to beat partnership tax at modest profit levels, but the gap narrows sharply once profits push you into the higher bands — it needs modelling with real numbers.
Admin burden
A partnership is lighter: register the partnership with HMRC, file a partnership return each year, and each partner files a personal Self Assessment return. No public accounts. A company means incorporation at Companies House, filing accounts and a confirmation statement every year, a Corporation Tax return, a registered office, statutory registers and directors' duties — noticeably more paperwork and usually higher accountancy fees. Many growing businesses happily accept that cost for the protection and structure.
Splitting income and documenting it
Whatever you choose, document it properly. In a partnership, a written partnership agreement sets out profit shares, capital contributions, drawings, decision-making and what happens if someone leaves. Without one, the Partnership Act 1890 defaults to equal shares regardless of who does what. In a company, profit splits are handled through shareholdings and dividends (possibly different share classes), so keep dividend vouchers and board minutes, and make sure dividends only come out of distributable profits.
The liability gotcha
This is the big one: in an ordinary partnership each partner is jointly and severally liable for the firm's debts — your friend's actions can bind the business and your personal assets can be on the line. In a company, shareholder liability is normally limited to unpaid share capital. If liability worries you but you like partnership-style flexibility, a Limited Liability Partnership (LLP) can be a middle ground, though LLPs still file accounts at Companies House.
Get proper advice before you commit — the right structure depends on your profit levels, how you want to take money out, and how much personal risk you can stomach.
