Setting Up a Business Partnership

A Business Partnership is a fairly straightforward way for two or more people to set up a business together. The challenge is that there’s no limited liability, which means that each person in the partnership is liable for all the debts of the business. In other words, if the business fails, you may end up owing a lot of money.

In order to guard against this, some partnerships opt for a limited liability partnership model. Or you could consider setting up a limited company where the liability is limited to the face value of the shares.

Features of a Business Partnership

  • Fairly simple to set up
  • Partners pay income tax on all profits
  • Unlimited liability
  • No formal registration requirements (unlike other corporate entities)

What happens if you don’t have a Partnership Agreement?

If a Partnership Agreement is not drawn up, business partners run the risk of being subject to the default provisions of the Partnership Act 1890 which include:

  • Partners must share equally in capital and profits (regardless of their initial capital contributions)
  • Partners must contribute equally to losses
  • Admitting a new partner requires unanimous consent of all the partners
  • A partner has no right to retire (giving notice to retire in some instances will have the effect of dissolving the partnership)
  • There is no power to expel a partner
  • Death of any partner will lead to the partnership automatically dissolving

Why have a Partnership Agreement?

A Partnership Agreement governs the relationship between the partners and provides: (a) certainty for the partners on how the business operates; and (b) options where the Partnership Act does not.

A Partnership Agreement should cover:

  • How you’ll split profits
  • How You’ll make decisions
  • What will happen if the partners can’t agree – who will have the casting vote, or how will you resolve the issue
  • What role each of you will play in the new business
  • What happens if one of the partners leaves or a new one joins

Your next move?

If you would like a Partnership Agreement drawing up or to discuss your business partnership, please contact our Commercial Team on [email protected]

Setting Up a Business Partnership

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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