What are partnerships?
A partnership exists in law when two or more people run a business together. The agreement between them to do so may be in writing or verbal or it may be that they have never actually discussed the matter but are "carrying on a business in common with a view to profit" (Section 1 of the Partnership Act 1890)
For example, Jane and Kelly have been friends for 5 years and decide to make and sell cupcakes together. They don't have any formal discussion about setting up a partnership but the acts of making and selling the cakes for profit means that have entered into a partnership agreement.
Why set up a partnership?
Partnerships are easy to set up and require very little administration and so can be very useful for small businesses. Unlike limited companies, however, all of the partners are liable for all of the losses that the business may make.
How do you set up a partnership?
There is no requirement in law to do anything but it is highly advisable to have a written partnership agreement in place to clearly set out the terms of the arrangement.
Why have a written agreement and what should it contain?
Partnerships are often entered into by friends and aquaintences and it is a sad fact that many long term relationships are soured by disputes arising from their business activities. Well drafted written partnership agreements can help to avoid unpleasant disputes by providing certainty about what has been agreed by:
- Clearly setting out the terms of the partnership agreement
- Identifying the roles and responsibilities of the individual partners
- Clarifying the rights of each partner, for example, to draw money and examine the business accounts.
- Providing for the ownership of any equipment used in the business
- Making rules for ending the partnership, accepting new partners and resolving any disputes that might arise between the partners.
What can happen if there is no written agreement?
Partnerships forged on verbal agreements are likely to end in dispute. For example:
Jane and Kelly start to produce their cup cakes. Kelly agrees to use her kitchen to make the cakes and Jane offers to deliver the cakes to their customers in her car. After 3 months business is booming and so Kelly invites her best friend Jenny to join the partnership but she doesn't consult with Jane. Jane decides to buy a van to transport the cakes and sees the perfect one for sale in her local paper and so uses money drawn from the partnership bank account to pay for it without consulting with Kelly.
Kelly is asked by an old friend to provide cakes for her daughter's wedding reception. Kelly decides to do this privately without telling Jane but uses some of the ingredients paid for by the partnership. Jenny enters into a deal to provide a supermarket with a regular order for their cakes. She decides that she is entitled to draw a bonus "finders fee" for arranging this deal.
Kelly receives a visit from her local Environmental Health Officer who is unhappy about the hygienic conditions of her kitchen and the fact that she has not registered with the local authority as a food business.
Jane wants to leave the partnership to set up on her own and doesn't want to be responsible for anything that Kelly and Jenny do after she leaves and she also wants to keep the delivery van.
Without a written agreement from the start it is very likely that this promising new business will result in a costly legal dispute.
How we can help
If you are considering entering into a business partnership then contact us using the form opposite to discuss the best options for you. It may be more appropriate for you to consider a Limited Liability Partnership or to form a limited company. We will be happy to advise you on the pros and cons of each option.
Once you have decided on the type of business that you would like to set up, we can draft a suitable written agreement which will clearly, in plain language, set out the rules of the business and the roles and responsibilities of those involved.
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