Should I Form A Partnership
A cynic once described a business partnership as a guaranteed way to end a good relationship.
Just be careful that you have a clear agreement in place with your partners before success or failure strike you. Success can be just as difficult to manage as failure in a business partnership. Here are a couple of things you must talk about before considering a partnership…
Your long term vision
Do you see the future the same way? Imagine this….you are becoming successful and you take this as a sign that now is the time to work harder and really grow the business. Your partner looks at your success and decides that it means he can now work shorter days and take a longer holiday. This is a recipe for much pain.
Exit - how do you get out or stop?
What do you do if one partner wants to leave? How do you value her share? What about if one partner has long term sickness, dies suddenly or your relationship breaks down. The more time you spend being honest with each other now the more pain you save yourself further down the line.
It’s the little things
Choosing a partner is much more important than choosing an accountant so do give it the attention it deserves. As well as bigger issues like your vision, expectations and exit plans consider the little things.
Barry Cade once had an unsuccessful partnership with someone he likes a lot and still does business with. One of the things that killed it was that he liked to talk through ideas on the phone, especially when he was thinking about new ideas or actions. His partner, on the other hand, preferred to communicate by email and after a while would let out a deep sigh when Barry called. It was never going to work.
Think about things like your preferred communication style, your partner’s skills and even things like are they as tidy and well organised as you? Some partnerships work well if the partners have very different styles, some work well if the partners have a similar style.
Honesty is not enough
Like any relationship you should go into a business partnership with your eyes open and a frank, honest discussion of how you will work together is not enough. Consider drawing up a partnership agreement and use it as an excuse to confront all the issues now. It is better not to go into business than to get into it and find it is not working. You can download a useful partnership agreement at Clickdocs.
This table summarises the legal situation…
| Issue | Partnership | Limited Liability Partnership |
|---|---|---|
| What is it? | Simply two or more sole traders who agree to work together | A membership agreement that offers members more protection that a straightforward partnership |
| Employment Status | Profits divided and taxed as personal income as if self employed | Profits divided and taxed as personal income as if self employed |
| Setting up formalities | A deed of partnership is a good idea. Register the partnership with HMRC in the same way as a Sole Trader | Register at Companies House and draw up a member’s agreement |
| Liability | You will be liable for your own and your partner’s debts. | Limited Liability similar to a Limited Company |
| Management | Partners share responsibility for managing the business | Members share responsibility for managing the business |
| Raising finance | Relies on partner’s finances | Relies on members finances |
| Records and accounts | As with Sole Trader | As with Limited Company |
| Profits | Profits shared by the partners. Agree this in advance! | Profits shared by the members. Agree this in advance! |
| Tax, NI and Pensions | Profits taxed as income possibly at the higher rate. NI cheaper but with fewer benefits. Tax deductible pension contributions restricted. Losses can be offset against tax on other income | Profits taxed as income possibly at the higher rate. NI cheaper but with fewer benefits. Tax deductible pension contributions restricted. Losses can be offset against tax on other income |
| Continuity | A partnership is dissolved if one partner dies, resigns or becomes bankrupt | LLP has perpetual existence. If the LLP has two members and one dies, another must be appointed within 6 months |
| Selling the business | Difficult as with Sole Trader | Difficult to sell part of it. All members must approve a sale |
