|  Partnerships
Partnerships are effectively a collection of sole proprietors and there are very few restrictions to setting up in business with another person (or persons) in partnership and several definite advantages. By pooling resources you may have more capital, several sets of skills to the business and if you are ill, the business can still carry on.
There are two serious drawbacks that merit particular attention. First, if your partner makes a business mistake, perhaps by signing a disastrous contract, without your knowledge or consent, every member of the partnership must shoulder the consequences. Under these circumstances, your personal assets could be taken to pay the creditors even though the mistake was no fault of your own.
Second, if your partner goes bankrupt in his personal capacity, for whatever reason, his or her share of the partnership can be seized by his creditors. As a private individual you are not liable for your partner's private debts, but having to buy him or her out of the partnership at short notice could put you and the business in a financial jeopardy. Even death may not release you from partnership obligations and in some circumstances your estate can remain liable. Unless you take 'public' leave of your partnership by notifying your business contacts, and advertising your retirement, you will remain liable indefinitely.
The legal regulations governing this field are set out in the Act, which in essence assumes that competent businessmen and women should know what they are doing. The Act merely provides a framework of agreement, which applies `in the absence of agreement to the contrary'. It follows from this that many partnerships are entered into without legal formalities and sometimes without the parties themselves being aware that they have entered a partnership.
The main provisions of the Partnership Act are as follows :
- All partners contribute capital equally.
- All partners share profits and losses equally.
- No partner shall have interest paid on his or her capital.
- No partner shall be paid a salary.
- All partners have an equal say in the management of the business.
It is unlikely that all these provisions will suit you so you would be well advised to get a `partnership agreement' drawn up in writing by a solicitor at the outset of your venture.
Why you might consider a Partnership
- As a means of starting up with increased capital (presuming both you and partners put money in.)
- You might not feel confident to start a business entirely on your own and would prefer to share the responsibilities with someone else.
- You have complementary skills - one of you may have specialist skills and the other, management flair, or one the money, the other, the ideas.
Choosing a Partner
If the business is going to have any chance of success, it is essential that the partners trust each other and can work together harmoniously. Also, since you and your partner(s) have unlimited financial liability for the firm, if things go wrong regardless of whose fault it is - creditors can claim the personal possessions of each and every partner.
If you are considering a partnership, ask yourself first if you have the right temperament to be a partner. Some people are too independent to be able to cope with pooling their ideas and resources on an equal footing.
There are no hard-and-fast rules about selecting a partner, but the most successful partnerships do seem to be those where the partners have known each other for some time - either as friends or business associates and where they have complementary skills and personalities. For instance, one partner may be a technical person who looks after the manufacturing side of the operation while the other is good at dealing with people and looks after sales, or the combination may be of an ideas person with a down-to-earth sort of person who can implement the ideas. Matching entrepreneurial skills also helps in selecting a partner.
Partnership Agreements
As already stated, the provisions of the Partnership Act apply if there is no other agreement between the partners, but it is sensible, if not essential, to get a solicitor to draw up a deed of partnership between you and your partners. You may want to vary the rules laid down in the Partnership Act and to cover points not mentioned. This documents also regulates exactly how the business is run. It should cover the points listed below.
- Profit Sharing: How profits and losses are to the divided. If, for example, one partner has sunk more capital into the business than the other, profits won't be shared in equal proportions or you may decide to distribute profits according to the number of contracts completed, the number of hours worked, or by some other methods.
- Withdrawing Money: It is important to limit the amount of money each partner can take out of the business each month, otherwise you may find you have insufficient working capital.
- Time off: The length and frequency of holidays should be laid down, as well as what rules apply if a partner is incapacitated through illness. The partner will be entitled to a share of the profits, so you may consider it important to stipulate a time limit after which the partnership can be dissolved.
- Duration of Partnership: How long do you want your partnership to last - one, three, five or ten years? Or you might prefer it to be for an indefinite period, terminating after, say, three months notice.
- Admitting or Expelling a Partner: The consent of every partner is necessary before a new partner can be admitted. If you want the right to have a relative, say your wife, admitted as a partner later, this should be stated in the agreement. Unless the agreement states otherwise, you must get a court order if you want to expel a partner, so the partnership deed should set out in detail the circumstances in which a partner can be expelled.
- Dissolving or Rescinding The Partnership: Dissolution will occur automatically on the death or bankruptcy of a partner - unless the partnership agreement provides otherwise. If you discover your partner has given you false information you may apply to the court to rescind the partnership agreement.
- Getting Capital Out: When dissolution occurs, a partner is entitled to have the partnership property sold and all assets distributed. After the assets have been realised and outstanding debts paid, any surplus must be distributed among the partners in equal shares - unless you make a different arrangement in the partnership deed.
The proceeds from the sale of assets must be applied in the following order:
--payment of creditors who are not partners
--repaying loans made by the partners
--paying back partners their capital contribution
--surplus divided among partners.
If there aren't enough assets, partners must make up the deficiency in the proportions in which they shared profits.
- Notice of Withdrawal from a Partnership: The agreement should state how much notice should be given to each of the other partners if one partner wants to withdraw. Remember, if you are withdrawing, that you are still responsible for all obligations, which your firm incurred while you were a partner. Give notice to all customers and suppliers that you are withdrawing and make sure your name is removed from the stationery. Advertise the fact in the newspaper.
- Conflicting Interests: Partners are free to engage in other business activities unless the partnership agreement prohibits this. However, no partner may engage in any activity, which competes with the partnership business. It might be sensible to provide for limited partnerships.
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