Starting a business with a partner is exciting but can be challenging if you disagree on how you’ll run your start-up – one way of mitigating this issue is to consider a partnership agreement to minimise disputes and focus on success instead.
Running a start-up with a fellow entrepreneur can have many benefits – it allows you to share the workload and challenges involved in building a company, and finding a partner with complementary skills means you’ll be better equipped to grow a successful business.
According to official government figures, there were 365,000 ordinary partnerships, the simplest form of partnership, in the UK at the start of 2023.
If you go down this route, it’s highly recommended that you set up your joint business venture properly so you’re better prepared if anything goes wrong.
This is where a partnership agreement can help, as it is a legal document that sets out the rights and responsibilities of each partner.
Before creating a partnership agreement, you should decide what type of partnership you will have.
What is a business partnership?
There are various types of business partnerships, which include:
- Ordinary business partnership –This typically involves two or more sole traders launching a business – the partnership is not a separate legal entity from its owners, which means that each partner has personal liability for any losses the business makes, and profits are divided between the partners.
- Limited partnership –This joint venture is made up of one general partner, and one or more limited partners – the general partner runs the day-to-day business and has unlimited liability (their personal assets could be at risk if the business can’t pay its bills), but the limited partners’ liability is limited to the money they have invested.
- Limited liability partnership (LLP) – This is set up by two or more members, whose personal assets are protected, with their liability limited to the amount they have invested – an LLP must be incorporated with Companies House and submit annual accounts, and each member completes a tax return with profits shared and taxed as income.
Read more details about each type of partnership.
What is a business partnership agreement and are they required by law?
A partnership agreement is a formal contract between all the partners involved in a business partnership.
It outlines how the partnership will run and each partner’s rights, roles, and responsibilities.
Partnership agreements are not legally required in the UK, but it is recommended that you create a written agreement using a lawyer to minimise any disputes in the future.
Informal partnerships without an agreement can lead to expensive legal battles if there are disagreements between the partners.
If you don’t have a partnership agreement, the Partnership Act 1890 will automatically apply, which means that profits, rights, and responsibilities will be shared equally among the partners.
This might not be suitable for your business, so an agreement ensures you have a legal document specific to your partnership’s circumstances.
What should a partnership agreement include?
It is highly recommended that you get professional legal advice when drawing up a partnership agreement.
An effective agreement should include the following information but this isn’t an exhaustive list and what should be included in a partnership agreement will be dependent on the specific business.
General business information
This section includes basic company details such as the partnership’s name, the type of business structure, its location, the partners’ names, and the agreement’s effective date.
Partners’ roles and responsibilities
This section should detail each partner’s roles and responsibilities and their level of involvement in the business.
Capital contributions
The agreement should outline what each partner will contribute to the business – this could be cash or something else, such as property, equipment, and services.
Ownership and profit-sharing arrangements
Include details of what proportion of ownership in the business each partner’s contribution provides.
You should also outline how any profits generated by the business will be shared between the partners.
Decision making
This section of the partnership agreement should outline the process for how decisions will be made in the business, such as using a voting system.
You can cover areas such as whether any decisions need to have the unanimous backing of all partners and whether the value of each partner’s vote depends on their financial contribution.
Dispute resolution
Disagreements can happen when more than one person is involved in a business.
You probably don’t want to go straight to court and be hit by expensive legal fees, so this section should outline the processes and procedures your partnership will follow to resolve any disputes, arguments, or disagreements.
For instance, this section could include the initial use of mediation services if there is a dispute.
Intellectual property rights
Whether your intellectual property is an invention, artwork, or computer code, you might discuss each partner’s specific role and how you will protect them or divide them if your partnership is dissolved.
Partner admittance and withdrawal
At some point in the future, you might want to add new partners to the business – this section should detail the process and how that might affect existing partners’ rights, roles, responsibilities, and equity share.
If a partner decides to leave the partnership, you need to have a plan for what will happen – the agreement should detail the notice period required and what happens to the departing partner’s stake in the business.
Tax and accounting
To avoid disputes, agree on your start-up costs and how you will manage the finances for your business – the way you pay tax will depend on the type of business partnership you have, and this should also be written into your partnership agreement for clarity.
Partnership agreement mistakes to avoid
Common mistakes to avoid in a partnership agreement include:
- Not using a lawyer – Getting help from a lawyer will ensure that you have a partnership agreement that is legally sound and tailored to your business.
- Omitting key details – You need to ensure your agreement doesn’t leave out essential information or include any ambiguous language that could be misinterpreted.
- Failing to amend when circumstances change – You should regularly review the agreement to make sure it reflects the current circumstances for your business and make any changes where necessary.
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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.
