Going into business with other people

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There are some extremely successful business partnerships, with partners who complement each others’ abilities and work together harmoniously for years. Some of these were started as jointly owned and run businesses from the beginning. In other cases, a business owner has brought one or more other people into an established firm to provide additional capital, expertise and other help. Whatever the circumstances, the arrangements between the parties need to be thoroughly discussed and formalised.

When they go into business together, the partners will probably be on good terms, optimistic and sure that they can work together in the future. On the other hand, when a business partnership breaks down, matters can become acrimonious and, at their worst, involve expensive litigation. Below we set out some essential matters to consider if you are thinking of going into business with someone else, whether the business is brand new or a new partner is being brought into an established firm.

Partnership, LLP or limited company?

The choice of format will depend on a number of factors. The LLP and limited company both confer the benefit of limited liability, whereas the partnership has the advantages of simplicity and privacy in that accounts, etc. do not have to be registered at Companies House.  A limited company has the advantage that more complex arrangements can be set up, perhaps using different classes of shares. Which format is chosen will depend on a number of legal and taxation considerations.

Having the right documentation

Whatever the format of the business, it is essential that the terms on which the partners go into business with each other are set out in the appropriate documentation. This cannot be stated too strongly. If the business is successful, it will become a valuable asset and the terms on which the partners own it and run it need to be clear. The process of drawing up the documentation will make them consider matters they may not have thought of. Most importantly, if they fall out, or one of them becomes ill, or dies, or personal circumstances change, there will be an agreed framework for making the necessary decisions. Without this, there is a serious risk of bitter and expensive litigation.

 

Key issues

These will vary from business to business, but typical matters that need to be decided and agreed
include:

• Financing the business
• What money (or other assets) will the partners bring into the business?
• What borrowing requirements (whether from the bank or others) will the business have?
• Do any issues of future finance need to be considered?

 

Sharing the profits

• How will the partners share profits?
• How will they decide how much profit to take out or leave in the business for development?

 

Running the business

• What voting power does each partner have?
• Who can make what decisions, and what matters require all the partners (or, if more than two, a majority of them) to agree?
• What rules, if any, should there be for calling and holding meetings?
• What rights do the individual partners (and their professional advisors) have to information?

 

Working in the business

• Is each of them to work full-time or just part of the time?
• Does the amount of time need to be specified?
• Will remuneration be paid according to how much work each does?
• Are there any restrictions on the partners having other work or business activities?

 

Bringing other people into the business

• Does this require a unanimous decision or a only a majority decision?

 

Leaving the business

• If one partner wants to leave, can they do so by giving notice?
• Can the other partner or partners then continue with the business?
• Can the remaining partner or partners buy out the outgoing partner’s share?
• Is the one who leaves to be subject to some restriction on setting up in competition?
• If a partner dies what happens to his or her share in the business?

 

What documentation will be involved?

This will depend on the business format and, if it is a company, the complexity of the arrangements. In a partnership or an LLP, the essential document is a partnership or LLP agreement, typically covering the issues set out above. With a company, the articles must contain appropriate provisions, and will often be supplemented by a shareholders’ agreement and/or directors’ service contracts. The articles are a public document, whereas shareholders’ agreements and directors’ service contracts are private to the parties who enter into them.

For further information, contact Jonathan Waters.