Humans, by nature, work better together. Partnerships offer founders someone to share ideas and responsibilities with, and someone to succeed or fail with.
When a partnership is formed, one of the first documents the partners should prepare and sign is a partnership agreement. If you’re entering into a business partnership, it’s key to have a solid partnership agreement to protect yourself and your business.
Let’s get a better understanding of partnerships first and we’ll conclude with the structure a partnership agreement should have.
What is a partnership?
A business partnership is a specific kind of legal relationship formed by the agreement between two or more individuals to carry on a business as co-owners.
Advantages of a partnership
Apart from the benefits of mutual support and knowledge sharing, there are some key positive aspects of partnerships over other types of business structures.
- Less formal and fewer legal obligations
The main advantage of a partnership is the lack of formality compared to a limited company. The accounting process is simpler, there are fewer records to maintain, no need to complete Companies House forms and can easily be dissolved.
- Easy to get started
The partners can agree to create the partnership verbally or in writing. There’s no need to register with Companies House and registering the business partnership for taxation with HMRC is quite simple.
The affairs of a partnership business can be kept confidential by the partners. By contrast, in a limited company, certain documents are available for public inspection and by the shareholders.
In a business partnership, the partners both own and control the business. There is no interference from shareholders, which makes it more flexible than a limited company and allows the company to quickly adapt to changing circumstances.
Disadvantages of a partnership
Although there are a number of advantages, the partnership model also has important disadvantages to take into account when making the decision of becoming a partnership.
- No independent legal status
A business partnership has no independent legal existence distinct from the partners. The resignation or death of one of the partners would mean the dissolution of the business.
- Unlimited liability
Again, because the business is not a separate entity from the partners themselves, the partners are personally liable for debts and losses incurred.
- Limited access to capital
Given the ease of dissolution, partnerships can appear to investors to be temporary enterprises. Banks and independent investors may prefer the greater accounting transparency, separate legal persona and sense of permanence that a limited company provides. Consequently, a partnership will often find it more difficult to get business loans or raise money than a limited company.
What is a Partnership Agreement?
Sometimes known as a Partnership Contract, Articles of Partnership, or a Founders Agreement, the purpose of a Partnership Agreement is to have a written record of how the partners intend to run the business, share profits, assets and costs, and to set out the responsibilities and contributions of each partner.
Importance of a Partnership Agreement
Going into business with someone is a little like getting married—so don’t go in blindly. Regardless of the degree of trust between the co-founders, an agreement should be put in place from the outset.
A partnership agreement ensures you and your partner are on the same page on what you can and cannot expect from one another. It’s essential to set out all obligations from the start to create a stronger foundation of trust and lead to a greater probability of a successful working relationship.
As with any business, there are bound to be disagreements between partners. Creating a written partnership agreement lessens the possibility of disputes arising down the road because the rules for the partnership are already agreed to and signed.
That’s why a partnership agreement is advised. It’s crucial to have a written partnership agreement because it sets up all the rules, responsibilities, and financial details of a business partnership.
What to include in a Partnership Agreement?
A standard partnership agreement typically includes:
- A partnership start date
- Partners’ names, addresses, and other contact information
- Description of partner capital contributions
- Profit and loss distribution
- Rules regarding the admission of new partners
- Accounting methods and annual report details
- Responsibility for the day-to-day management of the business
- Procedures for when meetings are held and voting rules
- Decision procedures, including which decisions require unanimous consent from all partners
- Dissolution procedures, including how property/assets will be divided in the event of dissolution
Need more qualified advice on partnership agreements and protecting your business arrangement? Book a call with our legal team and we’ll help you and answer all the questions you may have.