7th November 2024
Choosing the right structure for your business can be challenging when first starting out. The choice depends on multiple factors, making it essential to consult with accountancy and legal professionals to determine the best path forward.
This article will concentrate on one structure in particular: general partnerships. This structure offers a straightforward approach to business formation, making it a popular choice among entrepreneurs.
A general partnership exists when two or more people carry on a business with a view to making a profit.
In a general partnership, all partners share the responsibilities of managing the business and are usually involved in its day-to-day operations.
Whilst the simplicity of a general partnership is appealing, it also comes with significant responsibilities.
Each partner is personally liable for the debts and obligations of the business, which means that personal assets can be at risk if the partnership incurs debts or faces legal action.
Partnerships are often simpler to establish than limited companies and do not require registration at Companies House.
With fewer formalities and less public information, this setup is ideal for quickly starting a business.
Partners within a partnership are obligated to act in the partnership’s best interests. Additionally, they are personally responsible for the partnership’s debts and obligations because a partnership isn’t considered a separate legal entity and cannot independently acquire rights, incur obligations, or hold property.
The Partnership Act 1890 outlines the rules that govern general partnerships when no other agreement is in place. These provisions include:
A Partnership Agreement is a comprehensive legal document that specifies the terms and conditions governing a business partnership. This important agreement outlines the roles, responsibilities, and obligations of each partner, ensuring clarity and preventing potential disputes.
It also establishes the rules for managing the partnership, including how decisions are made, how profits and losses are distributed, and the procedures for adding or removing partners.
The provisions in the Partnership Act 1890 may not suit the way partners want to run their business. For example, one partner might provide all the capital of the partnership and the other might provide all the know-how and property.
In this situation, the partners would be advised to enter into a written partnership agreement to change or exclude the provisions of the Partnership Act.
A Partnership Agreement typically includes several key provisions to ensure the successful operation of the partnership.
It defines the partnership’s purpose and the roles and responsibilities of each partner, detailing what is expected from them to ensure accountability and clarity.
The agreement also specifies the duration of the partnership, the capital contributions made by each partner, and how profits and losses will be distributed among them.
It also outlines the decision-making processes, including voting rights and methods for resolving disagreements. Dispute resolution mechanisms are included to address and resolve conflicts that may arise. The agreement also details the procedures for a partner’s withdrawal, retirement, or the dissolution of the partnership.
Profits and losses are typically shared according to the terms outlined in the partnership agreement. This can be based on the capital contributions of each partner or other mutually agreed-upon provisions.
Having these terms clearly defined avoids any potential disputes or misunderstandings in the future.
Forming a partnership is a significant step that requires careful planning and a comprehensive partnership agreement is key to safeguarding the interests of all parties involved and in preventing misunderstandings or conflicts.
Whether you’re planning to form a partnership, have an existing partnership without an agreement, or need to update your current partnership agreement, our team of experienced commercial solicitors can assist you.
For further information, please contact Jo Convey, Commercial Solicitor with Myers & Co, on 01782 525029 or email joanna.convey@myerssolicitors.co.uk. Myers & Co has offices in Stoke-on-Trent, Staffordshire.
