If you're going into business with someone else, get the structure right
This is when two or more people combine to form a business unit. There was previously a restriction stating that a maximum of 20 partners was allowed but this has now been lifted. Each partner receives a percentage of the return of the business, depending upon how much they invested.
As with sole traders, partners are also responsible for all the debts incurred by the business. This does not only apply to debts incurred by that partner but any partner. Take care because creditors will take your personal assets to pay off debts incurred by other partners if necessary.
When considering what format the business should take, partnerships need extra attention. One of the most fundamental issues is to get a partnership agreement, according to Thelma Quince, who recently completed a study into 390 businesses in East Anglia.
Results of the study
Many choose to start together: · Of 390 firms in a study in East Anglia over 60% had been founded or acquired collaboratively · Of 500 high growth firms in the UK 68% had been founded or acquired collaboratively · Of the majority of these firms (between 75% and 80%) had been started or bought by people who were not related or married
Elaine Thatcher, Business Support Manager for The Prince’s Trust in London said: “The Trust in London requires all business partnerships to visit a solicitor (through our pro bono legal advice set up) and have a legal partnership agreement before we can finalise funding.”
Such an agreement will force partners to think about issues such as the structure and roles of each person involved as well as the likely exit routes for the partners, explained Quince. This can ensure that there is a mechanism for valuing and buying one partner’s shares.
“It is a bit like a marriage and divorce. Nobody wants to think about the fact that it could go wrong,” said Quince. But partners can address the issues in less confrontational ways by asking what each partner wants to do when they are bored of the business.
One of the common factors with collaborations that were not successful was the mutual respect, Quince observed. If you lose confidence in the competence of your partner and start to worry about whether they can do the job, that can be fatal, she warned.
When considering what format the business should take, partnerships need extra attention.