Solicitor Specialising in Business Partnership Formation and Disputes
Many people are completely unaware that although they have never signed any formal contracts, the mere act of being in business with someone else can be considered a business partnership in legal terms.
People often prefer to set up a partnership opposed to a limited company – why? It is easier and cheaper to set up and you don’t have to go through the process of registration or filing returns at Companies House. However, there are still many things to consider before going into business as partners.
For FREE initial legal advice about your business, just call our Solicitors on FREEPHONE 0800 1404544 or Salisbury (01722) 422300.
Your Business Partnership – Who Makes the Rules?
If there is no written partnership agreement, the Partnership Act 1890 comes into effect. This Act contains rules setting out how a partnership operates, and you may find your business is governed by rules which you’d rather avoid.
Getting a written agreement can significantly help eliminate the risk of any future dispute. What’s more, getting an experienced solicitor to draft your partners agreement will cost far less than getting legal help to resolve problems further down the line.
Our specialist commercial law solicitors represent partners in all aspects of partnership law from formation to dispute and dissolution. And we represent clients – both locally in Wiltshire, Hampshire, Dorset and Somerset and throughout England and Wales – from our offices in Salisbury, Andover, Fordingbridge and Amesbury.
What does a Business Partnership Agreement typically contain?
A well drafted Partners Agreement lays out the formal basis for your business and will typically cover the following issues:
· How to divide profits and losses
· Statement of who owns what percentage of the business or their contribution
· Control over decision making
· Any alterations to the 1890 Act default position that unanimous consent is needed for partner rights and obligations
· How new partners should be appointed
· How the partnership could be dissolved
· How any disputes will be dealt with
· What happens when a partner retires
· How a partner will be expelled, if necessary
· Provisions for buy or sell out
· Limitations on a partner’s business activities after leaving the partnership
· How capital will be split on dissolution
· What should happen in the event of the death or illness of a partner
What happens if there is no Partnership Agreement?
Partners disputes are often very complex, not to say messy, if there is no written Agreement.
In the absence of a written agreement, the Partnership Act of 1890 lays down some basic rules which include the following:
· Section 24 of the Act deals with financial contributions. In particular, if partners have not made equal contributions to the partnership capital, there is a presumption that when the business is dissolved, each partner will recover the same % of capital that they paid in.
· There is however, no such rule regarding division of profits or losses. As a result, if there is no written agreement, profits and losses are simply divided equally between partners.
· If there is no written agreement, a partner cannot be paid a salary.
· Property owned by the Partnership is another often contentious point. In the absence of a written agreement, the Act provides that any property brought into the Partnership becomes the property of the Partnership. If there is no written agreement on how any property should be shared, it is therefore split equally if the Partnership dissolves.
Is a Business Partnership Agreement Really Necessary?
Entering into business as partners can seem very easy; there are no upfront fees, annual accounts or unusual documentation needed, unlike with a limited company. However, business partnerships are rarely straightforward.
It is clear to see why a written agreement is so important when a dispute arises. In the absence of a written agreement, all partners are treated equally. It’s not uncommon for a situation to arise where partners reach a stalemate in a issue and just cannot reach a decision.
A well drafted written agreement will include clauses which can help to avoid this situation deteriorating into a lengthy dispute.
Click here to read more about Business Partnership Disputes
Written Partnership Agreements are particularly useful when a partnership breaks up. For example, if there is no written agreement, a partnership is automatically dissolved when a partner leaves.
Setting up a Business Partnership – the Advantages
There are many reasons why a going into your business as partners [as distinct from a company] is often a good idea, including the following:
· The partnership allows each partner to specialise in a particular area of the business. A good combination of partners generally has a better range of services and skills.
· It is generally easier to raise funds for a partnership than as a sole trader.
· Setting up a partnership can be done without the formality and expense of forming a company.
· A written agreement ensures that the partners are protected with safeguards within the partnership.
· Funds can be injected by sleeping partners without having to allow them control over business activities.
Setting up a Business Partnership – the Disadvantages
Going into your business as partners does have some downsides, although some of these can be avoided if you have a written Agreement from the outset. Some of the main disadvantages are:
· Each partner is classed as self-employed and has to do an annual tax return.
· Any profits are therefore taxed through personal taxation and not through corporation tax.
· National Insurance contributions have to be paid by each partner
· Creditors can chase any partner to pay a debt as they are all jointly liable.
· Creditors may be able to seek to sell a partner’s personal assets to settle a business debt.
Business partnership agreements – the biggest problem?
Having a written partnership agreement is critical. But it’s just as important to get the right one – that suits your particular circumstances.
And perhaps the biggest difficulties arising when you actually do have a written partnership agreement, are when either it is it poorly drafted or unclear on a particular point, or whether the agreement is completely silent on a particular issue. This is not unusual. And that’s the reason why you need a bespoke partnership agreement drafted by an experienced solicitor for your particular circumstances. Please don’t just rely on a free template download online. They may be worse than useless.
Each partner is liable, along with all of the other partners, for any debts which are incurred by the partnership. For example, this means that if a client sues the partnership and wins, every partner is jointly liable.
Partners are also said to have joint and several liability for negligence by another partner. If one partner acts in a negligent manner, the person who has been injured can sue any one of the partners. If a partner who has been negligent is sued by a client, then that partner can ask all the other to contribute to the damages awarded. In this type of case, each partner is said to be severally liable for the entire amount.
It’s also important for a partner to remember that if there is not a written agreement, then their own personal assets could be at risk if the partnership incurs losses or debts.
A well written partnership agreement is therefore essential to completely separate a partner’s personal finances from those of the business.
Retirement of a Partner
If there isn’t a written Agreement, when a partner retires or wishes to leave then the partnership is simply dissolved. A new partnership can of course be set up, but there might be tax implications to doing this.
In most situations, the partner who is retiring has the right to take his or her capital from the business with them when they go. However, that’s not the end of the matter. A partner who has retired is still liable for old partnership debts unless they agree otherwise beforehand.
If there is a written agreement, then this should contain the correct procedures for handling a retirement, and the retiring partner can check their situation is covered.
Getting rid of a business partner
In the absence of a written agreement, partners cannot be simply expelled, and you cannot change the way you split profits or carry on in business when one partner wants to dissolve the partnership if you do not have a written agreement.
All good written partners agreements will set out what should happen with mediation or arbitration if a dispute arises.
And it’s worth remembering that once a partner leaves, they have no contractual obligation to the partnership – unless it’s written into that partnership. So without any restrictive covenant in the partnership agreement, a departing partner is perfectly entitled to poach staff or clients, or use trade secrets.
Finding The Right Business Partner – 4 Top Tips
One of the main issues that people seem to get wrong in setting up a partnership is choosing the right partner or partners. Going into business with the wrong person will not only jeopardise your business but will also mean your personal finances will also be at risk.
These are our 4 top tips on how you can choose a business partner who will be right for both your business and yourself.
- Find Someone Who Shares Your Values But Is Not The Same As You
It is natural to want to go into a partnership with someone with the same goals and shares the same values as you – choosing someone who does not could mean trouble from the very beginning. Sharing the same business goals is essential to success otherwise you will both be working towards different goals.
However, it also not wise to choose a partner with exactly the same skill set as you – a partnership should be made up of people with the same goals but with different skills that complement each other.
A good combination in partners, for example, would be to have one partner who has considerable experience and knowledge of the service or product they are selling and to have another partner who has experience with budgeting and accounts. A partnership is about combining complimentary skills and talents together to get the best possible combination.
2. Always Ask Questions Before Entering A Partnership – No Matter How Awkward
Regardless of whether you have known your potential business partner for years, or even if you have only just met them, there are still many questions that you must ask before considering going into business with anyone.
Whilst some questions may seem somewhat awkward and perhaps an invasion of their privacy, you must get the answers to these questions before you agree on anything. Such issues that may prove hard to bring up are questions about your potential business partner’s financial situation and credit rating.
If you do not ask such questions beforehand and your partner does have a bad credit rating then you may find that you have trouble later when applying for a loan.
And above all, make sure you know who you are entering a partnership with. And it’s amazing how few people carry out what is known as due diligence on the new business partner i.e. really checking them out. Interested in finding more about due diligence on your new business partner?
Click here to download our FREE and exclusive Joint Venture Due Diligence Checklist
3. Pick a partner that you can talk to
You also need to pick someone who you feel comfortable in discussing difficult issues with. In our experience, one of the most common and yet easily avoidable reasons for dissolving a partnership is a basic lack of internal communication. Picking someone to go into business with, with whom you don’t feel comfortable talking to about difficult issues, is a recipe for disaster.
4. Choose a Partner That You Can Actually Trust
The most important aspect in choosing a partner is that you must be able to trust them as they will be involved intimately with the business, your reputation and even with your finances.
Employment rights during a partnership dispute
If a partner or member of a limited liability partnership is paid a salary, then they have all the same employee rights as anyone else. They are covered by discrimination or unfair dismissal law, and ignoring these issues could end up in a claim for substantial sums in compensation.
And one of the biggest issues with partnership agreements are restrictive covenants. These clauses attempt to restrict the ability of a departing partner from taking or approaching clients, poaching staff, setting up business locally in competition or taking keep this information. These clauses are particularly difficult to draft.
Click here to read more about Restrictive Covenants
Looking for the right legal advice? Contact our specialist Business Partnership Solicitors today
The commercial solicitors here at Bonallack & Bishop can give you advice on your existing partnership, or help you set up a new one.
We can make sure that your business is protected by a written agreement meets your needs and protects you interests and assets. And getting hold of the right written agreement is surprisingly inexpensive.