What You Need To Know When Setting Up A Business Partnership
A partnership is common in business ownership, either because it allows the company to raise more capital or the owners have individual specialities. Partnership’s involve two or more people who invest in a company and sign a partnership3 agreement before registering the company. The owners don’t have to all be involved with the everyday running of the company, some can have equal rights but be limited in participation.
Unfortunately, it is frequent that company owners don’t do enough research and the company ends up failing. It is therefore important to consider the following:
- Ensure you know who you are going into a partnership4 with to a good level. This includes both how you work with their personality, what experience they have, and their financial situation. For example, if they have taken out a large loan, will they be able to pay it back without effecting the business?
- Read and fully understand a partnership5 agreement before signing. Everyone in the partnership6 should be represented by attorneys, and make sure the operation clauses are realistic and work for all owners. It is worth reading templates online, so that you can discuss any clauses before spending money on attorney’s time.
- Be clear on the business plan. It is likely that it will change, but make sure you have planned alternative strategies should difficulties arise.
Profits, losses and taxes
The company’s finances are a shared responsibility of the partners, whether anyone in particular is to blame. If the company is making profits, this is shared between the partners.
Profits are attributed depending on the equity share split. Normally if someone has over 50% share, then they are in control of the company. Most partnership7s offer equal split.
Income tax is slightly different, and in the UK, each partner is responsible to only pay their own tax on income. To do this they therefore will need to register themselves as self-employed on start of the partnership8, and submit their own tax returns when they are due.
As briefly mentioned in the introduction, there can be several types of partnership10s within one company. General partner’s will have the responsibility of managing the company on a day to day role. They are also liable to paying any debts the company may incur, or fighting lawsuits against the company.
Partnership11s can also be split into different levels. For example, a senior partner can have more responsibilities within the company than a junior partner. The most common form of this is a limited partnership12, where one general partner manages the business and accepts liability, while other limited partners are less involved.
If a firm is a large partnership13, it is common to split between equity partners and partners on a salary. Equity partners are those who have invested and are entitled to a share of the firm’s profits. These companies tend to be limited liability partnership14s, where there is more than one general partner and responsibility is split. Be careful not to confuse this business structure with a limited liability company, as there are some crucial differences between them.
Joining an established partnership15
If agreed by all existing partners, then a new partner can be hired or can invest into the company. A company might decide to look for new partners if; it needs to raise capital, or the incoming partner can add expertise or clients to the business. The new partner’s contribution, and liability is dependent on the type of partnership16 they are offered.
Unless otherwise agreed, a new partner will not be liable to any debts that the company has accrued before their arrival.
As we have discussed, a partner’s liability can vary. This is why it is essential to ensure that your partner(s) are financially capable of participating in a business venture, before deciding on the type of partnership17 roles you will have.
If you are in a position where company debts are required to be paid, creditors will always try to claim from the company before registering claims against company owners. If a partner leaves the partnership18 while debts are owed, then they will still be liable to contributing to repay the debts. This is still the case, even if the leaving partner has died or is too ill to contribute to the company.
Breaking from a partnership19
Ending a partnership20 can often be messy, and usually requires a settlement agreement. This is a legal agreement that agrees to the termination, and whether you will continue in employment for the company, or maintain any ties. If an agreement cannot be reached, then a dispute claim may need to be processed.
A settlement agreement may also be necessary if the company is under offer for a takeover.
Partnership21s have a long history of being successful, and if you follow some common sense steps there is no reason why a startup cannot succeed as a partnership22.
Since qualifying as a lawyer in the UK 2 years ago, I worked in commercial law. Outside of work, I like to keep fit in the gym and write for blogs.