How to set up your business – Part Two – Partnership

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In the second of a series of three articles about how to set up your new business, we will be looking at the Partnership option…

In many ways, the partnership route to setting up a new business is very similar to setting up as a sole trader – with the obvious difference that more than one personis involved. A partnership can be formed by any number of partners – it doesn’t have to be just two people. It is common practice for some professions to be operated as partnerships regardless of size – for example accountancy firms.

HOW DO I SET UP A PARTNERSHIP?
Setting up a partnership is very similar to setting up as a sole trader. You can choose a ‘trading as’ name and simply become ‘Bob Smith and John Green trading as ‘County Plumbers’. In the same way as with a sole trader business, if you are trading under a different name to the partner’s names, you need to list the partners name and a business address on any stationery.

Again, it is not necessary to register the partnership name with anyone, but each partner must advise their tax office of their new self-employed status.

In addition, whilst it is not a legal requirement, it is absolutely vital that the new partners draw up and sign a ‘Partnership Agreement’. This agreement should normally be prepared by a solicitor and will outline such points as:

The names of the partners
The name of the business and its purpose/activity
Date the partnership begins (and time it will last if appropriate)
Details of initial investment by the partners and details of interest to be paid to partners in respect of their investment (if any)
The profits split – not all partnerships split profit 50/50. If you put 90% of the capital up and your partner only worked part-time for the business, would you want to share the profit down the middle?
Details of how the business will be managed and who will have control over different aspects
What will happen if a partner dies, retires or wants to leave or sell his/her share of the business

When a new business is being set up, especially if it is being set up by friends, it is very easy to forget about or just not bother with a partnership agreement. I cannot stress strongly enough –

YOU ABSOLUTELY MUST HAVE A PARTNERSHIP AGREEMENT!

I have seen numerous businesses run into difficulty because the partners have fallen out over a particular issue and some have even ended up taking each other to court. If they had of had a partnership agreement, this may have been avoided.

It is worth mentioning at this point that there area couple of different types of partner (actually there are a few more, but these are the main two types):

FULL PARTNER A full partner will be involved in the day to day running of the business and will share in the profit/loss of the business as agreed in the partnership agreement.

SLEEPING PARTNER A sleeping partner will not normally be involved in the day to day running of the business. This type of partner normally makes a financial investment into the business and in return will benefit from an agreed share of future profits or an agreed return on his/her investment.

FINANCIAL LIABILITY
Again, in the same way as with a sole proprietorship, the partners are personally liable for any debts of the partnership, with one very important difference. Each partner is jointly and severally liable – this means that each partner is liable for any debt of the business, including the share of the other partners.

To illustrate, if a business runs into financial trouble and Partner A has no personal assets and Partner B has considerable personal wealth, then the creditors of the partnership (the people that are owed money), may decide to pursue Partner B for everything owed, as it is more likely that they will get the money back than from Partner A.

The above applies regardless of which partner committed the partnership to the debt in the first place or whether the partner is a full or sleeping partner.

Because of this ‘joint and several’ liability, it is vital that you fully trust your partner – it is perfectly possible that his/her actions could cause you to be made bankrupt. An extreme point maybe, but nonetheless possible and it does happen.

TAX/NATIONAL INSURANCE
As with a sole proprietorship, partners pay tax as per the normal rates, based on their share of the profits generated by the business.

National Insurance is the same – each partner pays the fixed level of Class 2 contributions and then may have to pay Class 4 contributions based on their share of the businesses profits.

FINANCIAL RECORDS
In the same way as a sole proprietor is not legally obliged to prepare audited accounts, neither is a partnership. It may however be even more advisable for a partnership to employ a qualified accountant or book-keeper, as the fact that the profits of the business are being shared between two or more partners may complicate the individual partners’ tax position slightly and it is best to make sure that everyone pays what they should.

CREDIBILITY
There isn’t really any difference between the credibility of a partnership and the credibility of a sole proprietor. A partnership may be seen as being a slightly larger concern, but as stated above, some larger companies will still prefer to deal with a limited company rather than a partnership.

There are some exceptions to this – as already mentioned, some professions, such as accountants or solicitors, will trade as partnerships and this is seen as being perfectly acceptable and indeed, the ‘norm’.

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