Starting a business with someone else can make a lot of sense. You can combine experience, contacts, ideas, and investment, while sharing the work of getting a new venture off the ground.
But going into business together is also a commitment. It is easy to spend time discussing the business name, website and first customers while putting off conversations about money, roles and responsibilities, and what happens if one of you eventually wants to leave. However, those conversations are worth having early.
In this guide, our business law team highlights what you should consider if you are thinking about setting up a business partnership, and some of the main things to consider before you get too far down the road.
Is a Partnership the Right Structure for Your Business?
The first question is whether a partnership is actually the right structure for the new business you want to build.
In a typical business partnership, two or more partners run the business together and personally share responsibility for it, including certain losses and business expenditure. Each partner will also be responsible for paying tax on their share of the profits.
That is different from setting up a limited company or a Limited Liability Partnership (LLP), where the legal structure and liabilities work differently.
There is no single structure that is right for every new business. Consider factors such as how you predict the business to grow, how much risk is involved, whether you intend to bring in other people later and what each founder wants from the business.
Seeking early advice from relevant professionals will be important. An accountant can advise on the tax implications, while a business solicitor can help you understand the legal differences and make sure the structure fits what you are trying to achieve.
Have the Difficult Conversations Early
Even if your new business partner is a lifelong friend, family member, or someone you have already worked with, that doesn’t remove the need for clear, legally set-out arrangements.
Before formally setting up the partnership, have an honest conversation about how it will work. Who will be responsible for what? Will you both work in the business full time? Are you investing the same amount? How will you share the profits, and what will you earn? What happens if one person is working considerably longer hours six months from now?
You should also talk about how certain decisions are signed off. For example, there may be some decisions that can be made individually. However, other more significant decisions such as taking on significant borrowing, changing the direction of the business, or admitting another partner may need everyone to agree.
While it can feel strange or negative to discuss potential disagreements before the business has even started, it is considerably easier than trying to have the same conversation once a dispute has already arisen.
Put a Partnership Agreement in Place
A handshake and a good relationship are not a substitute for a written partnership agreement.
Without an agreement setting out different arrangements, provisions in the Partnership Act 1890 can determine how the partnership operates. For example, the Act provides that partners share equally in the capital and profits of the business unless they have agreed otherwise. That might be exactly what you want, but if it’s not, it could be difficult to prove otherwise without a written agreement.
A partnership agreement lets you set out your own arrangements while everyone is on the same page about those decisions.
It can cover areas such as:
- How profits and losses will be divided
- What each partner is expected to contribute
- Roles and responsibilities
- How important decisions will be made
- What money partners can take from the business
- Whether new partners can join
- What happens if a partner wants to leave or retire
- How a departing partner’s share will be valued
- What happens if somebody becomes seriously ill or dies
- How disputes will be handled
This is one area where a generic document downloaded from the internet can create a false sense of security. The useful parts of a partnership agreement are the ones that reflect how your business and working relationship operates in practice.
Get the Practical Set-Up Sorted
Once you have agreed how the partnership will work, there are a few more practical steps to deal with as well. For an ordinary partnership, you will need to choose a business name, choose a nominated partner and register the partnership with HMRC. The nominated partner is responsible for the partnership tax return and business records, while individual partners also have their own registration and tax responsibilities.
An LLP has different requirements. It must be registered with Companies House and has its own rules around members and designated members. An accountant will usually be closely involved with the tax and accounting side of the set-up.
Think Beyond the Partnership Agreement
The partnership agreement is important, but it is unlikely to be the only legal document the new business needs.
Depending on what your business will be and the type of customers you are trying to attract, you may also need customer terms and conditions, supplier contracts, employment or consultancy agreements, confidentiality agreements, and documents covering your website and use of personal data. We have covered this in more detail in our article, Started a New Business This Year? Here Are the Main Documents You Need.
It is much easier to sort this paperwork while the business is still relatively new than to untangle unclear arrangements after a problem arises.
What If You Are Already Trading Without an Agreement?
There is no need to panic if you have started running your business without a partnership agreement in place. Plenty of partnerships begin informally and only look at putting a written agreement in place once the business has been trading for some time.
In some cases, having some trading history can help identify the issues the agreement needs to cover. Perhaps one partner has taken on more responsibility than originally expected, the profit split needs reconsidering, or the business has grown to the point where bringing in another business partner is becoming realistic.
The important point is not to wait until the relationship has already broken down before you try to resolve a difference of opinion. If disagreements become more serious, our article on Dealing with a Partnership Dispute explains some of the issues that can arise and why getting advice early can matter.
Setting Up Your Partnership Properly
A successful partnership needs more than legal paperwork. You need trust, communication and a shared idea of where the business is going.
Having the right paperwork in place supports and protects that relationship and your business.
At Rose & Rose, our business start-up solicitors work with founders and entrepreneurs across Kingston upon Thames, Surrey, and the wider London area to establish the right legal foundations. We can help you choose the right business structure, get the paperwork in order, understand your legal and regulatory obligations, and avoid the common pitfalls that catch out new business owners.
Arrange a Consultation with Our Business Start-Up Team
Please contact us on 0208 974 7490 or info@roselegal.co.uk to discuss the best way forward for you, and we will provide you with further and specific advice tailored to your circumstances. Our experienced business law team are here to help you. We will work with you to ensure the best possible outcome.
Wider Legal Considerations – Your Personal Affairs Matter Too
A new venture often means rethinking your personal legal position as well. Owning shares in a company or having an interest in a partnership changes how your estate will pass under your Will. It also means that if you were to lose capacity due to illness or an accident, someone would need the legal authority to keep the business running, access bank accounts, and make decisions on your behalf.
Our Wills & Probate team can advise on making a Will or putting a Lasting Power of Attorney in place alongside the business work, so the protection joins up.
If you are married, getting married, or going through a divorce, our Family Law and Divorce team can also advise on setting up a prenuptial agreement or postnuptial agreement or on how business assets, investments, and pensions might be treated in a divorce.
