Small Business UK
Advice and Ideas for UK Small Businesses and SMEs
What happens if I don’t draft a partnership agreement?
When any entrepreneur starts their own business, one key point for consideration is the structure of the business. Commonly, most people set up as either a sole trader or as a limited company.
However, partnerships are set up by people who tend to know each other fairly well and want to work more flexibly without the mound of admin work that usually comes with a limited company.
A partnership agreement sets out operational and regulatory rules for the partnership. If written correctly, it is deemed to protect all involved as it allows partners to set out how liabilities, ownership and profits will be split and what will happen if one partner decides to leave. As a partnership, you are not legally required to draw up a partnership agreement although it is recommended.
Without a partnership agreement, it is assumed that:
· Both partners are equal. This means that they will have an equal say in decision making and will also have an equal share in profits, even if this wasn’t practised in the business.
· Partners also have a joint liability for debt, loss or damage that has arose from any wrongful acts of the other partner.
So if you don’t sign an agreement, it will be assumed that no matter what the business practices, you will have equal responsibility/ liability for the business and your business partner’s practices.
One thing to also note is that if you start a business with someone, you are legally required to notify HM Revenue & Customs and you will likely face a fine if you do not. Yet, the business is not required to pay tax as a whole, but rather partners are taxed individually and treated as though they work in separate professions.
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