Very unusuall partnership situation need advice

Hi Guys,

Long winded so please keep with me.

Myself and my business “partner” run an automotive tuning company that we grew together. he has his patch, i have my patch and we now have 3 franchises which we have sold and delivered together.

Technically we are both still classed as sole traders and have never formed a legal partnership. we both have quickfile accounts and both keep our own accounts and draw as sole traders. I take roughly 50% more than him.

I now have to go LTD as i hit VAT and have no choice. Basically for him its either a case of he comes with me as a LTD with 2 directors or he stays sole with no input in to the company as i grow it.

Natrually i would like him to come LTD with me and stay in with the business however this is where it gets complicated. As an LTD we would need to be on 1 account with all monies been paid in and out of this account then PAYE been paid from this also.

The difficulty is it would be unfair to have a 50/50 split on this as i bring in much much more than him. How do people suggest we keep a track of the quickfile account and how would we work out a fair split etc? is this going to work?

one way i was thinking is to keep a monthly balance sheet external to quickfile so we could see in % what each party was bringing to the business and divide this way?

any advice would be good

Why do you need to go Ltd. when you hit the VAT threshold?

There is nothing anywhere that says you have to become a limited company when you hit the VAT threshold - I’m aware of a number of entrepreneurs running seriously big businesses as sole traders.
Have you looked into an LLP (Legal Limited Partnership) rather than a Ltd company? I’ve done quite a bit of research into this, prior to myself and my business partner founding our company (which is an LLP) and the LLP structure allows division of “salary” (partner’s drawings) based on either straight percentages or partner contribution to profits - it doesn’t have to be a 50-50 split, as the partnership agreement can specify either way.
However, once you start getting into the area where you are not only liable for VAT but possibly higher rate income tax, there seem to be advantages to a limited company - despite liability for corporation tax - as income can be taken as dividends (which attract a lower tax rate) rather than salary…
I have to stress however that, although I have advised on company formation and helped a number of businesses set up, I’m not an accountant or tax advisor, just someone who does a lot of internet research and reads the HMRC small print :wink:
I’ve always found the legal team at Co-operatives UK to be exceptionally useful in providing business formation advice - you might want to consider setting the business up as a worker’s co-operative (with the workers being you and your partner), as there are distinct benefits (including free business banking!) for doing so :smile: