9 Things to consider before forming a business Partnership

A business partnership is the one thing that can build one of the biggest businesses or destroy it. Going into a business with a partner can help you in sharing resources, capital and risk too. Some people have more risk appetite, and then others have less.

Many people don’t fully understand the partnership business definition. I think it is high time for you to understand it in the first place and then get into more details about the business partnership.

What is a business partnership?

A business partnership is a form of agreement between two or more people. These people co-own the business and share the responsibilities of running the business. However, this responsibility can be changed depending upon the type of partnership. Be it profit or loss that a business generates, they are responsible for it.

Section 1 (1) of the Partnership Act 1890 defines a partnership as: “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit“.

Check our : beginners guide to growing your business

Types of partnership
Things to consider before forming a business partnership

Now that you know what a partnership business is let us see different types of partnership.

Types of partnership

IN Uk, there are three types of partnerships. Let’s learn more about each now.

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Ordinary partnership
The ordinary partnership is the basic type of partnership. In this partnership, there is no legal existence distinct from the partners.

Let’s assume that two partners are doing a business. If one of the partners resigns, goes bankrupt or dies, the business will continue by dissolving the partnership.

Both the partners will take the business responsibilities and are liable for profit or loss.

The nominated partner registers the Ordinary partnerships with HMRC for Self Assessment.

Limited partnership
The limited partnership is strictly financial. This has a mixture of limited and ordinary partners. Whilst the ordinary partners are responsible for running the business, limited partners are liable only for the amount they have invested and any other financial support they have promised.

They don’t have to file annual returns or accounts of the business. They are responsible only for investing money in the company and cash its profits or bearing its losses. Either way, they will get registered in Companies house, and one has to let HMRC know about it so that they can set up the tax records accordingly.

Limited liability partnership (LLP)
LLP, as the name suggests, the partners here have a little liability. It is the most common type of partnership in the UK. Let me explain it clearly.

In LLP, there must be two designated partners at least. Partnership income is taxed in the hands of each partner, i.e. every partner pays tax on the profits that they get. Because of the limited liability- like a shareholder has in a company, the liability of each partner is limited to the amount of money they invested in the LLP.

LLPs are required to:

  • register with the Companies House
  • file annual accounts with the Companies House
  • file Self-assessment tax return with HMRC
  • file a confirmation statement with the HMRC

Check our guide to : HMRC and Companies House penalties.

These are the three types of partnerships available in the UK. No matter which type of partnerships you opt for, you must be thorough with your research to make the right choice.

Things to consider before forming a business partnership

This article will list nine things to consider before starting a business partnership.

1.  Do you need a partner?
Now, this is the first and foremost question that you have to ask yourself. If you hesitate to answer this question, then I suggest you do not partner with that person. There should never be any hesitation or second thoughts about the business decisions that you are about to make.

As said earlier, a wrong partnership can break your business. Now, this is not something a business owner afford, right. So, think thoroughly before making a decision. You should always be objective and practical at the same time.

Liking and trusting the partner is subjective. Not everyone would love a person, right? You will partner with them, so it is important first to trust the partner and like them enough to share your responsibilities.

The next thing is practical thinking. Your partner is supposed to bring some new and exciting things to the table that you can’t. If they are not adding any value and have skills, only the knowledge similar to you, then do you need a partner?

First of all, before you do any big promises or signatures, think about these things. It will surely throw light on your perspective.

2.  Business partnership agreement
Once you have decided on a partnership and had the final talks, it is time to put everything on paper. Some businesses utterly fail because of a lack of proper documentation. Word agreement will not matter when things fall apart or when things work out too well either.

All the partners need to get together and write an agreement stating whose share is what in the organisation followed by all duties and responsibilities- also known as partnership deed. You will be sending the same agreement to HMRC for taxation purposes too. So, make sure that you have everything listed on paper in a detailed manner.

Remember that emotions should never be the governing factor in business; logic and practicality are more important.

3.  Know your partner
So, how much do you know about this person with whom you are partnering? Since how much longer do you know them? What kind of a person they are, and what do you know about their morale and ethics?

Answering all of these questions is quite important. If you don’t know these things about your partner yet are rushing into business with them because the idea is good or something, you are making a big mistake.

Knowing with whom you want to partner is not easy. A simple way is to partner with people you already know for at least one year. According to a few psychological studies, a person will show their true self in a year.

This one-year time frame will help you understand the person, their traits and every other detail, which will help you know how good they will be with the partnership.

The financial status of your partner is another thing to consider. Initial capital is important for businesses, and if your partners can pool that amount without any debt, it will be a good thing for your firm. So, understand the financial condition of your partner first.

Take some time to understand your partner and before rushing into the business.

Know about : COVID 19- introduction to 100% government-backed business loans.

4.  Core values and goals
Many important factors come under this. What are the core values that you carry, and what is the vision? When it comes to business, so many people hesitate to be brutally honest about their requirements and the long term vision.

A business partnership is nothing less than a financial marriage. If you don’t share the same kind of values and thoughts, then it will be a bumpy ride down the road, and it will cost a lot at the same time. To avoid any issues, it is important to stay crystal clear about all the thoughts you have in mind.

It is common for us to not think about the worst-case scenarios, but you have to. While putting up the partnership deed, talk about everything in it, including what happens after the demise of partners. Everything should be watertight and set up perfectly legally.

5.  Expectations and role of partners
Know what are the expectations of each partner from the business in the first place. The personal goals should meet with the business goals, or it is going to be a mishap.

Each partner should be clear about their roles. Whether skilled enough to be responsible for their position or not is an important matter to think about.

6.  Try before committing
It is important to know how you and your partner are going to work together. For this, have a trial run. Just work together for a couple of months and see how your mindsets align and how well you can work together.

You can increase this time if you are unclear about whether they will make a good partner or not. Do not commit without a trial run at the start.

7.  Scalability
Can you scale the partnership? Can you involve with this partner for the long term through thick and thin of your business?

The gains that new partnership brings to the table should outweigh the cost at which it comes. If this is the opposite, then think about whether you want a partner or not?

Guide to know about : 15 types of business models and how to choose the right one.

8.  An exit plan
Always think about the worst-case scenario no matter what. We all start something new thinking that we are going to succeed, but that will not be the case all time. It is important to know what to do when things don’t fall in place.

Make sure to write the exit plan in your partnership agreement so that you can be on the safe side if you want to exit. The same applies to your partner too.

9.  Tax implications
As said in the types of partnership section, each type of partnership will have different taxation. So, be clear on how HMRC will tax you and your partners in the first place.

See : how to get the biggest tax refund possible?

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There are so many benefits of the partnership business, but one thing is that you and your partner have to be very clear on all the things. You will be able to share funding and liabilities with a partner, leading to a successful business.

You have to find a partner who will be an addition to your business but not a liability. So, think about all of these things thoroughly and then make a decision.

123Financials Editorial Team
The 123Financials editorial team is composed of seasoned finance and accounting experts with a combined experience of over 20 years. Specializing in UK finance, accounting, and tax-related content, our team is dedicated to delivering insightful and practical advice to startups and small businesses. With a strong background in both the theoretical and practical aspects of financial management, we ensure that our readers stay informed and empowered to make sound financial decisions. Whether it’s navigating the complexities of UK tax laws or providing strategic financial planning tips, our team is committed to excellence and accuracy in every article.