Introduction to Partnerships
Apart from the sole trader and limited company route, there is also the option of setting up in partnership with one or more individuals. Partnerships are formed for a variety of reasons but usually it is because a group of people who have different strengths and weaknesses can perform more effectively as a collective than as separate entities.
Selecting your Partners
A partnership can consist of two or more people. Legally, there is no limit to the numbers of individuals who can be involved in a partnership. In reality, however, it is inadvisable to have more than four or five partners, as it can become difficult to reach any consensus of opinion and to manage the business.
Ideally, all partners should have their own specialist areas or expertise and knowledge; this could be an industry specific niche or a finance or legal background. When selecting your partners, it is worth listing the different skills that your business is going to require and then ensuring that all aspects are adequately covered. Sometimes, it may be possible for a partner to join the business purely as a financial investor who will not actually become involved in the day to day running of the business. This type of partner is commonly called a ‘silent’ partner.
It is not necessary by law for a partnership to have a partnership agreement. However, it is always considered desirable so that every member of the partnership knows exactly where they stand, both in terms of financial and time input and output.
A partnership agreement is very similar to any other commercial agreement and can be freely negotiated between the parties. Typical issues that should be addressed include:
- The amount of financial input that every partner will offer
- How this financial input will be paid and how frequently, e.g. will there be a monthly payment?
- How much time the individual partners will be expected to put into the business and during which hours
- What areas of responsibility each partner will have
- How the partners will be paid or how the profit will be divided between the partners
- Who will be liable for any debts that the business may amass
- How a partner can leave the business and how much notice is required
Importantly, with a partnership, in the absence of any other agreement, all partners will be joint and severally liable for debts.
This means that any one individual partner could become liable for all debts, if the other partners disappeared or were unable to meet the debts.
- Joining a partnership can be an excellent way to gather financial resources or expertise that you as an individual do not possess
- It is possible to have any number of partners as well as silent partners who simply invest cash but do not get involved in the day to day business
- It is always advisable to draw up a partnership agreement so that everyone knows where they stand
- Remember, one partner can become liable for ALL debts, if there is no agreement to the contrary
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