Are you thinking about starting a business partnership? Have you considered the important steps before making this big decision? Because, believe it or not, there are many.
A business partnership is an arrangement between two or more people who work together to make profit. As such, it comes with legal obligations that each of the parties involved have to meet.
There are many types of partnerships – three of them being more common in the UK: general partnerships, limited liability partnerships (LLPs), and limited partnerships (LPs).
Regardless of the type of partnership, there are important steps to consider to minimise potential risk and ensure you meet your legal obligations, even when the business partner is your best friend or family.
This blog scrutinizes some of the key takeaways to consider before saying “I do” to a partnership.
Ensure you are setting up the right partnership for your business
First things first, you and your partner need to decide about the structure of your business partnership. This means getting familiar with both the benefits and risks that may come out of the different types of partnerships.
General partnership is the most common business structure due to the minimal costs and flexibility. Moreover, there is no requirement to register with Companies House as opposed to LLPs and LPs.
However, due to its nature, a general partnership can be easily set up by accident. If, for example, you and your friend work together on an idea without signing a formal written agreement or giving your business a name, the chances are you have already set up a general partnership.
However, the risks and consequences that come from this simple agreement are many including:
- Penalties for not registering with the HMRC and failure to file partnership tax returns
- Risking having to use default laws governing partnerships due to the lack of a written agreement
Get to know your business partner
When starting a business partnership with someone else, it is just common sense to ensure that you are choosing the right person for you and your business. By getting to know each other better, regardless if it’s family and close friends, you are both making sure you have similar values, vision and goals.
If your partner is someone you disagree with constantly, it is a red sign from the outset. This doesn’t mean you will always disagree with their opinion on something. But the more aligned your values are the better for your business growth and professional relationship.
It is recommended that you know your partner for at least a year before you start doing business together. Do deeper research if necessary. Ask his/her previous colleagues or former boss about their work ethic, leadership skills and anything you need to know that will benefit or destroy your business and partnership.
Get it all on paper
While a general partnership doesn’t require a formal written agreement. It is advisable to get it all on paper to avoid troubles down the road. From terms and conditions, to expectations and roles, rights and entitlements, make sure everything is made loud and clear.
By signing a formal written agreement you are also making sure that you will run your business and partnership the way you and your partner wish. Failing to sign a written partnership agreement, will give leeway to default partnership laws, which have their own set of rules and will decide for you the following:
- all partners must share profits and losses equally
- no partners are entitled to remuneration from the partnership
- partners can’t be expelled
- any partner can terminate the partnership by giving notice to the other partners
Unless you agree with the default partnership rules, it is best you create an agreement where you and your partner make the rules and choose how your partnership is run.
Final thoughts
These are only a few important steps to watch out for before saying “yes” to a business partnership. Make sure you get familiar with them and look for legal advice if you are still struggling to start a business partnership. You may also find our handy start-up guide, available from our shop here, very helpful.
In addition to legal advice, we recommend you also ask for accounting and tax advice. You must ensure that the business structure you choose best fits the needs of your business and business partnership.