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Entering into a business partnership is a significant step. Combining two or more people with a shared vision to create a successful business can be a stepping stone to future success.
A partnership is a relatively straightforward form of business set-up, but it is not without its pitfalls. How do you make decisions, ensure the share of risk and reward is fair, and handle any disagreements?
Ensuring there is a clear understanding between the parties about their roles, how finances will be managed, disputes resolved and decisions made can minimise the risk of disputes at a later date.
For this reason, many people entering into a business partnership will use a formal partnership agreement.
But what is a business partnership agreement, what are its advantages, and is one required if you’re entering into a business partnership?
What is a business partnership?
A business partnership is a business that is formed between two or more partners, as opposed to operating as a sole trader or forming a limited company. According to the Partnership Act of 1890, a partnership is when two or “more persons are carrying on a business in common with a view of profit”.
The principal difference between a partnership and a limited company is that a limited company is a completely separate legal entity from the business owners. In other words, the partners would not be personally liable for debts incurred by the business. In a partnership, the partners share responsibility for the business, such as losses and bills.
Limited companies have a more complicated structure than partnerships, take longer to set up and there are more requirements when it comes to filing. Partnerships provide a relatively straightforward structure as well as some tax advantages with partners taking their earnings from company profits rather than taking home a PAYE salary. Partners pay taxes as individuals rather than being paid by the partnership as a business entity.
What are the legal requirements of a partnership?
There are three basic steps to setting up a partnership:
Choose a name for your business
Choose a name for your business that is distinctive and doesn’t infringe on existing trademarks, isn’t misleading, or could be considered offensive.
Choose a nominated partner
The partners within the partnership should select which of them will act as the nominated partner. They will act as the main point of contact for any official correspondence with HM Revenue & Customs (HMRC). The nominated partner will be responsible for managing the tax affairs of the partnership and keeping business records.
The nominated partner also assumes personal liability for any penalties or fines that HMRC might impose due to non-compliance with the partnership’s tax obligations.
Register with HMRC
You then need to register your partnership business with HMRC. This can be done online via the HMRC website.
Other requirements may include registering for VAT and securing any necessary licenses and permits relevant to your business area.
Is a partnership agreement mandatory?
There is no legal requirement to have a partnership agreement in place for a business partnership.
A partnership comes into being at the moment when one or more people begin trading with the intention of making a profit as set out in the Partnerships Act.
However, it is generally advisable for anyone launching a business partnership to have a firm set of agreements about how the business will be managed.
This is particularly important when it comes to potentially contentious issues such as finances and how important decisions are made.
While having a good relationship between partners is desirable for successful partnerships, establishing some basic agreements about the partnership, how it will be managed and responsibilities can create a stronger framework for success.
Crucially, a partnership agreement can be a way in which partners can manage potential disagreements at a late stage. Even a very limited partnership agreement can clarify a number of key issues that could potentially be contentious.
What is a partnership agreement?
A business partnership agreement is a legally binding document that creates a framework for the responsibilities, rights, and obligations of the partners in a business partnership.
It will outline a range of terms and conditions that have been agreed upon by the partners.
Legal professionals will usually draw up the agreement and will include a range of provisions. Each partnership agreement will be unique to the particular business and the requirements of its partners but will usually include several common features.
Typically, the agreement will cover essential provisions such as the purpose of the partnership, its scope, the capital contributions that will be made by each partner, and how profit and loss will be allocated.
If, for instance, someone is making a larger financial contribution at the outset they may expect a larger share of the profits. It will usually include management responsibilities, as well as the procedures that will be followed should a partner wish to leave the partnership, or a new one wishes to be added.
The partnership agreement should act as an ongoing reference document for reducing risks and resolving disputes while helping to support a productive partnership.
Can a business partnership exist without a written agreement?
A business partnership effectively comes into being at the moment when two or more people begin trading together with the intention of making a profit.
Before or shortly after they begin trading, they should notify HMRC of their business details and who will be acting as the nominated partner.
There is no requirement for a partnership agreement and many partnerships will begin trading without one in place.
However, having a partnership agreement in place from the beginning can provide clarity and certainty, while helping to ensure that there is a clear framework for resolving potential disputes.
What legal documents are needed for a partnership?
A business partnership is a simple structure that is formed by one or more people coming together to provide goods and services for profit.
It is based on an agreement between two people who wish to work together. As a result, it has no distinct legal status. The only legal requirement for any partnership business is that it’s registered with HMRC.
Each partner is also required to register independently for self-assessment and to complete a tax return.
However, depending on the nature of the particular business, some documents may be required. These include:
Intellectual Property Agreements
If a partnership has intellectual property, such as trademarks and copyrights, specific agreements to manage and protect them may be required.
Contracts & Agreements
Contracts and agreements with suppliers, clients, and service providers may also be required. Written agreements can define the obligations and responsibilities of each party to provide clarity and certainty.
Business Partnership Agreement
While a business partnership agreement isn’t a legal requirement when setting up a business, it is highly recommended.
This is a legally binding written document that sets out the terms and conditions of the partnership. It will usually include the roles and responsibilities of each partner, how profits will be shared, disputes resolved, and decisions made.
It provides a strong contractual framework that can reduce the risk of disagreements while providing a means by which they can be resolved.
What should be included in a business partnership agreement?
There is no set format for a business partnership agreement nor any particular legal requirements. When considering what to include in the agreement it’s important to think about what it is attempting.
A limited partnership agreement will provide the framework for the business so will usually include several key components:
The Purpose of the Partnership
The agreement should begin by briefly outlining the purpose of the partnership. This will usually be the specific activities of the business, but it may also be to hold and manage assets on behalf of the partners.
Rights & Responsibilities of the Partners
The business partnership agreement should clearly outline the role each partner will play in the business, as well as what’s expected of them. It will address any specific duties or areas of expertise that each partner may bring, and what this means in terms of their respective contribution.
Profit & Losses
The partnership agreement should set out how any profit from the business activities will be shared. In many cases, this will mean equal shares for each partner.
In partnerships where each partner has different roles and levels of responsibility, these may be different. The same applies when one partner is making significantly more financial contributions at the outset than other partners.
How will decisions be made within the partnership? Will key decisions be discussed, or will there be different areas of responsibility where each partner can act independently? The business partnership agreement will detail how key decisions will be made and potential disagreements resolved.
The partnership agreement will usually outline the process through which a partner can leave the partnership and how assets and liabilities will be divided. It may also contain provisions for a new partner joining the business at a later date.
Should a dispute between partners arise, a clear and coherent dispute resolution process can limit the potential damage it can cause to the business. The business partnership agreement will set out this process and each partner will agree to abide by it should a dispute arise at a later date.
Duration & Termination
The agreement may include details of the duration of the partnership. For instance, the partnership may be set up for a specific, time-limited purpose.
The continuation of the partnership might need to be revisited and discussed at a later date. The partnership agreement will also set out how the business will be wound up.
If a founding partner leaves the business do the remaining partners have the right to continue using the business name?
On what grounds can changes to the partnership agreement be made and how will this be handled?
It’s important to remember that each business partnership agreement will be different and will reflect the particular needs and requirements of the business and partners.
Do I need a solicitor for a partnership agreement?
While it’s not essential to use a solicitor for a business partnership agreement, it is highly advisable to do so.
They bring their expertise and knowledge to draw up your agreement. They will ask questions about the partnership and what you hope to achieve, as well as mediate between different parties to find common ground and agreement.
They will ensure that the agreement that is drawn up fully meets the particular needs of the business in addition to providing advice to help ensure that key areas are not left out.
They also provide legal clarity, ensuring that the agreement is watertight. A well-drafted business partnership agreement removes potential areas of dispute, ensuring that all parties understand what they are agreeing to.
At Wilson Browne, our highly experienced team of company and commercial solicitors will work closely with you to ensure that your business partnership agreement is tailored to your particular needs.
We will ensure your document is watertight and understood and provides a robust framework with which you can manage your business.