Kay Waddington, a Partner in the Corporate department at North West law firm Stephensons Solicitors LLP, says: “Forming a partnership is a relatively easy way for at least two of more people to run a business. There are no legal steps to take when forming the most basic of partnerships, so if two people set up a business such as a market stall, their business would be known as a ‘Partnership at Will’, and would be governed by the provisions of the Partnership Act.
“Unlike a limited company, the members of a partnership would have little or no financial protection if the business ran into trouble. Partners are personably liable for the debts of the business, leaving their personal assets such as their homes vulnerable. Many small partnerships aren’t aware of this risk or don’t plan ahead fully, they see it as a risk they are prepared to take.
“Should one of the partners die or want to leave the partnership or retire, or if the partners cannot resolve a disagreement so the partnership cannot continue in its current state, it must be dissolved.
“However many of these issues and pitfalls could be planned for in advance through the drafting of a partnership agreement. Although it is not a legal requirement when creating a partnership, I would strongly recommend putting an agreement in place which clearly sets out the rights and responsibilities of partners.
“The agreement often includes details such as working arrangements and the types of decisions which will need collective approval of the partners, the value of capital each partner contributes to the business and the way partners will share profits and losses.
“It could also set out how new partners should be appointed and importantly, what happens if a partner dies, or wants to exit the partnership.
“Not all partnerships remain on friendly terms and should one of the partners make a decision which has a negative impact on the business, the other partners may be liable, so it is sensible to enter into a formal partnership agreement from the outset.”
One way of limiting the liability of the partners would be to convert to into a Limited Liability Partnership – an LLP.
Kay says: “Many professional services firms have taken this route already and there is still a strong demand for this type of partnership.
“The benefits of converting to an LLP are various. For example, an LLP offers reduced personal responsibility for the business debts, as the partnership, not the individual members, would be liable for any debts of the business.
“Setting up an LLP can be complicated so I would advise companies to seek the assistance of their legal and accounting advisors before embarking on this process.”