Starting a business can be a very exciting and busy time, it can be easy to overlook or delay planning for if things don't work out. Before you sign up to significant costs it is important to get a written partnership agreement in place to give you peace of mind.
Do you already have a partnership?
It is a matter of fact whether a general partnership exists regardless of your intentions. Partnerships are formed automatically when you go into business with at least one other person or company with a view to make a profit (Actually making a profit is not relevant as it all turns on whether you each have an intention to do so).
A partnership can come into existence before you even start your planned business activity. Planning arrangements such as renting premises and beginning decoration can sometimes give rise to a partnership existing.
Risks of general partnerships
Whilst partnerships can be a cost-effective and efficient method for starting a business you need to be aware of the risks.
All partners are personally liable for all of the partnership's debt and obligations. This means that if one of the partners takes on loans for the business without your knowledge or permission you can still be personally liable. Partners are also each liable for the whole of the debts and obligations of the partnership separately so if the other partners can't afford to pay you will be liable for everything.
The default position under Partnership Act 1890 is that profits are to be shared equally. If one partner is contributing significantly more time and money to the business this can easily lead to conflicts.
On review of the potential risks you may find it more appropriate to start your business as a limited company. If this is the case, this is something we can also assist with.
What is a partnership agreement?
A partnership agreement is a contract that provides security to all those involved in a business partnership. This typically covers the roles and responsibilities of each person and is created to reduce the risk of conflicts in the future.
Common areas to consider in a partnership agreements:
- Profit and loss proportions
- Any business decisions that should be restricted / require joint decisions
- Holiday entitlements
- Process for joining or leaving the partnership
- Restrictions on leaving partnership (confidentiality and competition)
- Roles (jobs) of each partner
- Capital (money or assets to be introduced by each partner)
Originally published 19 Jan, 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.