A business partnership is where two or more people own a business together and share in the profits and losses.
You need to think about how your business partnership will work. This includes deciding who is responsible for what, and how profits and losses will be shared. If you don't have a well-structured agreement, the business may fail and you may not be protected.
There are over 414,000 partnerships in the UK. This makes up for 7.5% of all the businesses in the UK.
This is a large percentage of people, but over 70% of partnerships eventually end up failing.
A successful business partnership is one in which the partners have complementary skills, knowledge and strengths that help the company achieve common goals. However, circumstances and attitudes can change over time, leading to dissatisfaction among the partners.
Many partnerships do not have a written agreement that states how the partnership will work. This can lead to problems because the relationship is not legally defined.
If you don't have a partnership agreement, it can lead to an imbalance in the split of responsibilities, profits, losses and damages. This can cause the business to collapse.
For more information on how to structure a partnership agreement in the UK. See Crest Legal.
Business Partnerships explained
In a partnership, two or more partners work together to run the business. If one of the partners retires or leaves, and there are only two partners left, the partnership may automatically dissolve unless a new partner is appointed.
One key business decision is whether to go it alone or enter into business partnerships with other companies. Going it alone has advantages and disadvantages, as does business partnerships. Here are some benefits of business partnerships:
Shared ownership
Business partnerships provide an opportunity for shared ownership of a company. This can help to spread the financial risk involved in starting and running a business
Profits
Business partnership profit-sharing arrangements can help to promote financial stability for the business
Experience and knowledge
Business partnerships provide an opportunity to pool experience and knowledge, which can be beneficial for making decisions and strategy formulation.
Greater funding options
Business partnerships can open up opportunities for additional funding when new partners are brought in
Control
Business partners retain control of their business while still being able to take advantage of the benefits of business partnerships
Financial resources and skills
Business partners combine their financial resources and skills, which can be advantageous in terms of achieving economies of scale, developing new products or services, or expanding into new markets. Business partnerships therefore have the potential to provide significant benefits for those involved.
Who is in Charge?
In business partnerships, who is in control depends on the type of partnership. In an Ordinary Partnership, all partners are jointly and severally liable.
This means that each partner is liable for the debts and losses of the partnership.
In a Limited Liability Partnership (LLP), a mix between an ordinary partnership and a limited company, members are not personally liable for debts and losses of the partnership (the LLP is).
This is because an LLP is an incorporated company.
In a Limited Partnership (LP), which is not an incorporated company but certain partners can be designated 'limited partners' who have limited liability, they are only liable for the capital they invest in the business.
Therefore, how you structure your partnership affects who is in charge.
Who Is Liable For A Bankrupt Partner?
If one partner in a business goes bankrupt, the default position under the Partnership Act is that the partnership will be dissolved.
However, this may not be what the other partners want, particularly if there are existing obligations.
Whilst all partners are not liable if one partner becomes bankrupt, the creditors may be entitled to the bankrupt partner's shares in the business.
The creditor could opt to become a silent partner in the business, sharing profits and losses, or they can enforce a sale of the assets so that the bankrupt partner's share can be cashed out.
Bankruptcy can have a major impact on a business, so it's important to consider all eventualities before entering into a partnership.
Why Every Business Should Have a Partnership Agreement
Partnership agreements are essential for any partnership. They outline the roles and responsibilities of the partners, and set out important issues such as the split of profits, the decision-making process and how to deal with retirements and appointments.
Without a partnership agreement in place, many partnerships can end up wrangling over the legalities and extent of ownership of the partnership.
Having a partnership agreement is the best way of protecting your interests and assets in the partnership.
It also ensures that future costs of dealing with any boardroom disputes are significantly reduced, and there is a clear outline of the roles and responsibilities of each partner. So if you're thinking about entering into a partnership, make sure you get a partnership agreement in place first!
Creating a Partnership Agreement
A business partnership agreement is a legally binding contract that outlines the roles, responsibilities, ownership, and financial stake of partners in a business.
While the specific terms of a partnership agreement will vary depending on the type of business and the partners involved, there are certain essential elements that should be included in every agreement. These elements include:
Partner appointments and retirements
This clause outlines the process by which partners can be appointed or retired from the partnership. It should include provisions for how to handle disagreements between partners and what happens to a partner's shares if they leave the partnership.
Profit and loss distribution
This clause outlines how profits and losses will be distributed among the partners. It should specify how much each partner will receive based on their ownership stake and whether there are any conditions that must be met before distributions are made.
Ownership of assets and capital
This clause specifies who owns the assets and capital of the business. It should outline how ownership will be determined, whether there are any restrictions on transferability of ownership interests, and what happens to assets if the partnership is dissolved.
Decision making
This clause outlines how decisions will be made within the partnership. It should specify who has authority to make decisions and how disagreements between partners will be resolved.
Termination of the agreement and dissolution
This clause outlines the conditions under which the partnership agreement can be terminated and what happens to the business if it is dissolved. It should specify how long the agreement will last, whether there are any provisions for early termination, and what happens to each partner's shares if the partnership is dissolved.
Duration of the agreement
This clause specifies how long the partnership agreement will remain in effect. It should include provisions for renewing or terminating the agreement and specifying when it can be amended.
Roles and responsibilities
This clause assigns roles and responsibilities among the partners. It should identify who is responsible for what tasks and outline any expectations for partner involvement in decision making or day-to-day operations.
Liabilities and losses
This clause allocates responsibility for liabilities and losses incurred by the business. It should identify who is responsible for paying debts incurred by the business and how losses will be shared among the partners.
Restrictions on the partners
This clause restricts What activities partners can engage in outside of the Partnership Agreement. For example, it might prevent them from competing with The Partnership Agreement or disclosing confidential information.
Management of liabilities and indemnities
This clause sets forth procedures for managing debts owed by or to The Partnership Agreement. For example, it might require that all bills over $X must be approved by a majority vote of The Partners before they can be paid.
Payments and expenses
This section establishes how often Partners will receive payments (e.g., monthly, quarterly) as well as when they are required to make contributions to The Partnership Agreement e.g., initial investment, capital calls.
Finally, it covers what expenses are allowable under The Partnership Agreement as well as who is responsible for paying them.