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