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The perks and pitfalls of starting a partnership: Essential advice for would-be business partners

| Danielle Chetwynd | 3 June 2024

Going into business as a partnership can be a great way to achieve your shared goals as you build a business together, but partnerships can be a complicated and costly endeavour with your own personal assets at risk if debts or other liabilities arise.

Since 2010, the number of business partnerships in the UK has dropped by 20%, according to the Department for Business and Trade - even though the number of SMEs has increased by almost a quarter.

So why are partnerships falling out of favour, and are entrepreneurs overlooking what could be a great opportunity? Here, we’ll explore how a little support from a legal expert can make partnerships a great option for business owners.

Legal partnerships offer a simplified and flexible approach

Partnerships can offer simplicity and flexibility similar to being a sole trader (such as the ease of formation) but the risks and responsibilities are shared with another person.

A partnership can be formed without any formal documentation and registration with HMRC for taxation is simple. There are also fewer records to maintain than there are for companies. A partnership can also be dissolved at any time.

Unlike a limited company, partnerships do not need to keep statutory registers, file a confirmation statement or file accounts (partners just file their own self-assessment tax returns) - saving time and labour that could be spent running the business - they’re also not bound by the same financial rules that govern limited companies.

In a partnership, the partners both own and control the business, unlike in a company where the directors manage the business day to day and the shareholders own the company. The partners are therefore free to pursue the business they operate without interference or input from any shareholders. This can make a partnership business more flexible than a limited company, with the ability to adapt more quickly to changing circumstances.

If you work in a sector that experiences a sharp variance in seasonal income, such as farming, establishing a partnership with someone you know and trust could be a viable way to underpin your business, effectively share profits and more easily manage assets.

Joint responsibility for liabilities

Because partnerships aren’t counted as a separate legal personality, you and your partner(s) will own all of the business assets personally but you will each be personally responsible for any debts and liabilities that the business incurs.

This means that creditors could try to recover business debts from you personally and your own assets, including your home, could be at risk.

This is an inherent risk with partnerships so it is vital that you trust your other partner(s) but the risks can be reduced with the support of a solicitor who can help you create a partnership agreement.

You could also set up your business as a limited liability partnership or as a private limited company to minimise your personal liabilities.

Disagreements within partnerships

With more than one person owning a business, there will almost certainly be times when you disagree over the best way forward. Conflicts between partners can cause confusion, and threaten morale, and they can even completely derail the business and lead to its breakup so it’s important that these can be prevented.

One of the best ways to prevent disagreements from becoming rifts is to create a written partnership agreement with a solicitor. This will set out how your business is to be governed and it will also set out your obligations to each other regarding debts and other liabilities.

Drafting a comprehensive Partnership Agreement

The concept of partnerships is an old one, as some sellers, tradesmen and labourers were legally required to enter into a partnership to set up a business. For this reason, the guiding legislation that becomes the default framework of a UK partnership is the Partnership Act 1890.

This is not the most up-to-date legislation and doesn’t account for modern problems business owners are likely to face. However, you can overrule this act if you submit your own legally binding Partnership Agreement.

Say, for example, you work in a partnership with one other trusted individual. If they were to die, retire or become incapacitated, it would mean the sudden and immediate dissolution of your partnership. Under this, your bank accounts would be frozen and any shared assets would need to be sold off. This could put you in the unfortunate position of having to buy back some of your own belongings that you entered into the partnership. This also impacts how you can bequeath assets to family and friends - as it is not automatic. These default positions under the Partnership Act 1890 can be modified through the creation of a partnership agreement.

When starting a partnership, it is good practice to clearly specify:

  • How are decisions made?
  • How are profits shared? Without an agreement, partnership profits must be shared equally.
  • Which assets contributed by yourself and your partner(s) remain personal property and which become joint property? (For example, a vehicle used for business as well as personal transit)
  • What happens upon the retirement or death of one or more partners?
  • Under what specific circumstances can you expel someone from the partnership?
  • If one or more partners declare bankruptcy, what does this mean for your partnership?
  • Does the partnership have a specified timeframe?
  • Will partners have access to rights such as maternity pay and/or sick leave?
  • How are new partners admitted?
  • How are disputes settled?

Establishing a legal partnership can be a flexible, tax-friendly way of doing business if done right.

Always take expert legal advice in preparing a Partnership Agreement and ensure that you have a comprehensive array of provisions for unexpected outcomes - or risk finding yourself under the limited protection of the Partnership Act 1890, which could mean an abrupt end to even the most fruitful partnerships.

For more information about starting a partnership, get in touch with our team of legal experts today.

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