Going into Partnership–Our 5 Top Tips
9th July, 2012
We decided to put together 5 top tips on partnership to be tweeted one a day last week. Whilst it was fun trying to condense that vast body of law that is partnership into 5 snippets of 140 characters each, we thought it might be useful to expand them into a blog; so here goes.
The five tweets said:
- 5 top going into partnership tweets. No 1 – Choose your partner very carefully. Being friends is not enough. Will you work well together?
- 5 top going into partnership tweets. No 2 – Get a professional partnership agreement. You think you won’t fall out; so it’s just insurance.
- 5 top going into partnership tweets. No 3 – Agree who does what; who puts in what time, money or things and who takes out what and how.
- 5 top going into partnership tweets. No 4 – Agree what happens if 1 wants to leave. What do they take, over what time and can they compete?
- 5 top going into partnership tweets. No 5 – Consider forming an LLP; it has the flexibility of partnership but gives you some protection.
We chose these five areas as they are the areas that we find cause the biggest issues in partnerships and LLPs. This article is not intended to be a partnership law book – there are a few good ones already written – but to expand on the 140 characters.
- Choosing the right partner sounds obvious. Getting on well together is one thing and having a shared passion for whatever it is you plan to do is very useful; but have you worked together before? How will you cope when things get tough? Do you have the same vision, values and beliefs? How do you want to treat customers, clients, suppliers and staff? Is the business a lifestyle choice, a vocation or a vehicle to make money, and if a combination of the above, what takes priority? It is these areas that tend to make partners fall out. We’ve given you some more questions to answer, rather than answers, but you need to sit down and have a serious conversation with your potential partner(s). Partnership is often described as commercial marriage and, as in marriages there are some discussions it is best to have before the ceremony, in partnerships there are some discussions to have before you start the business.
- We acted for some guys who bought a business together. They were school friends. By the time they’d paid for the business, taken over the lease and paid the legal costs, they said they couldn’t afford £1,000 for a partnership agreement. Being so close, when they did fall out, it was extremely acrimonious and the ensuing legal fees cost them about £10,000 each. The business also lost value during the protracted arguments. A partnership agreement would have made life simpler; not necessarily more pleasant, but maintained value in the business and saved time and costs. The next two tweets cover key elements that must go into the partnership agreement.
- One of the oddities of the Partnership Act is that there is no obligation on a partner to actually do any work. They can take a share of the profits and are liable for all the losses, but they don’t need to turn up. One of the key points in a Partnership Agreement is that partners are expected to work! They are usually excluded from working elsewhere, except by agreement with the other partners. It also needs to be made clear what are partnership assets and what belong to the individual partners. If one partner brings his or her tools to work, who do they belong to? Intellectual property created in the partnership needs to belong to the partnership. Profits are shared equally unless otherwise agreed. The partnership agreement needs to reflect what the partners want. This may vary based on what they contribute in terms of assets or work, or how much work they do. The key is that it must be agreed.
- People do leave partnerships and it is not something that you necessarily consider when you set one up. Under the Partnership Act a partner can dissolve a partnership, which brings about its end. This is usually not ideal and a Partnership Agreement will prevent this and set out what happens when a partner wants to leave. It can also include expulsion clauses should a partner misbehave. You need to decide what they take with them when they leave. If they have contributed capital to the partnership, they must be allowed to take it out, but it is often not sensible or possible to give them a cheque on the day they leave, so you may wish to consider a time frame, for example payments over 2 years. If a business has grown in value, should a departing partner be allowed to take a goodwill payment and how will it be valued and paid? Additionally, a Partnership Agreement will usually also contain restrictive covenants to stop a departing partner setting up in competition.
- A Limited Liability Partnership rather than a traditional partnership provides the partners, who are called members in an LLP, with limited liability. All partners in a traditional partnership have joint and several liability, which means they may have to pay all debts of the partnership. An LLP is not a partnership with limited liability; it is more a company with different tax rules. There are additional benefits, such as being able to create fixed share members of senior employees, which has tax benefits for both the LLP and the fixed share members.
So, we hope this gives you a fuller idea, in approximately 5,600 characters rather than 140, of some of the basics of setting up a partnership.
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