Starting out in business can be an exciting yet daunting time for you. Are you better off going it alone or would a business partnership suit your particular situation? Before you make a firm decision about your formal business structure, here are a few questions that are worth clarifying first.
- What is a partnership?
In law, a business partnership is not a legal ‘identity, unlike a company or an individual. Instead, it is a framework of rules for a situation where two or more people are working together, in pursuit of a common, commercial goal.
In practice, this can take a variety of forms. It could be a family firm of electricians who work together every day. It could also be a collection of individual professionals who share support services, such as a firm of solicitors, architects or GP surgery.
Importantly, business contracts with the partnership are in fact contracts with each individual partners, and the responsibility for fulfilling the terms of the contracts rests with all partners collectively, regardless of which person actually signed on behalf of the partnership.
- Who leads the business?
Partners in a partnership are deemed to have equal rights and responsibilities in the way that business is conducted, and financial rewards or losses are shared – unless a written partnership agreement says otherwise. If no such agreement exists, the Partnership Act 1890 is the relevant governing legal document.
Informal partnerships without a written agreement can work well for a small number of partners and where the business is relatively small and uncontentious. With little at stake, there’s not much to argue over and even if you have a strong disagreement with your partners, walking away from the partnership without too much stress or loss is quite straightforward.
- What are the pitfalls of an informal partnership?
As stated above, without a written prior agreement, the Partnership Act 1890 assumes that all partners are equal. So if one person contributes more capital, works longer hours, brings in more business or has a grander title (Managing Partner, Managing Director, Senior Partner etc), s/he is not automatically entitled to greater remuneration or shares in the business. Not surprisingly, disagreements tend to arise most commonly over the value and reward of individual contributions to the business.
What’s more, a trading business will quickly accumulate intellectual property (IP) and intangible assets – customer databases, websites and domain names, business name and reputation, work in progress etc – that may not mean much to third parties but are the lifeblood of the business partnership. Not only are these aspects extremely hard to put a value on, they may also have a greater or lesser significance for different partners. Deciding on the ownership shares of IP and intangible assets can be a real headache in business partnerships.
Finally, risky business dealings have the potential to plunge the entire partnership into financial debt. If one partner makes unwise decision, not only is s/he responsible for the consequences, but so are all the other partners. In the worst case scenario, this can include the personal bankruptcy of partners who weren’t involved in (or even knew about) the disastrous decision.
- Why should you draw up a detailed, written partnership agreement?
There is only one sensible way to protect all partners’ interests in the business that everyone is working so hard to make a success of: agree everything, ideally at the outset, in one comprehensive partnership agreement. That way, there’s no confusion and everyone can focus all constructive energies into the business.
There is not a great deal of regulation surrounding partnership deeds aside from the very general 1890 Act and various specific taxation requirements, so partners are relatively free to agree what they wish. However, rather than being tempted to keep things simple, it’s important for the partnership deed to be a comprehensive document, since anything missed out will revert back to the 1890 Partnership Act.
It is recommended that the legal document should include all important issues concerning
- Joining and leaving the partnership
- Financial remuneration and division of profits
- Ownership of assets and capital brought into the partnership
- Decision making structures and day-to-day business management
- Retirement provisions
- Dissolution of the partnership
- How do you terminate a partnership?
If things are not working out for whatever reason and you wish to leave the partnership, it’s important to leave on good terms and to negotiate a fair exit outcome for all concerned. Clearly, the process for terminating the partnership should be set out in the written partnership agreement.
There are 5 main ways to dissolve a partnership:
- By agreement according to the partnership agreement
- By notice of termination
- By expiration – eg. end of a fixed term partnership, completion of a specific project
- Death or bankruptcy of one or more of the partners
- By application to a court for an order of dissolution
A dissolution agreement should address all the key points in the partnership deed and particularly consider and provide solutions for the business’ distribution of assets (including intangible assets) and liability of debts, with final partnership accounts being drawn up and taxes paid.