There are some extremely successful business partnerships, with partners who complement each other’s abilities and work together harmoniously for years. These may have started as jointly owned and jointly run businesses from the beginning. In other cases, a business owner may have brought 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. 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, there are several key matters to consider.
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 the relationship between the partners breaks down, or one of them becomes ill, 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
Sharing the profits
Running the business
Working in the business
Bringing other people into the business
Leaving 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.
Whatever the business format, it is essential that the agreements between the parties are thoroughly discussed and formalised.
For more information on any of the above, or how we can help you, please contact Mark Adams on 0191 232 8345.
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