How to set up a partnership

A partnership is created when two or more people agree that they will run a business together and do so with a view to making a profit. A partnership can be a useful and simple manner in which to run a business because not much is required to set one up. There is no need for a formal agreement, but the terms of a partnership are often formalised by entering into a written partnership agreement. You should also choose a name for your partnership, and a ‘nominated partner’ who will be responsible for tax returns and keeping business records.

Note that jointly held property or part ownership of assets does not, of itself, create a partnership.

The partnership agreement

It is usually helpful to formalise a partnership in writing so the terms of the partnership are clear and unambiguous. This is known as the ‘partnership agreement’. If you do not enter into a written partnership agreement, the law implies terms into the partnership which may be unsuitable for your needs. For example, unless otherwise stated in a bespoke partnership agreement, all partners will be entitled to share equally in the capital and profits of the business and must contribute equally to the losses.

Here is a list of areas that you may want to consider addressing in your partnership agreement:

• Name – the business or trading name of the partnership should be fixed and stated in the agreement.
• Place and nature of business – the agreement should state the partnership’s offices and the type of business it operates.
• Duration – partners may wish to specify a fixed term (a set number of years after which the partnership agreement will be terminated). If the partners wish the partnership to continue after this time, the agreement can state that the partnership is to continue automatically on the same terms after the fixed term has ended, unless otherwise terminated.
• Financial contributions – the agreement should state how much capital each partner is contributing at the outset to run the business.
• Profit-sharing, salaries and interest – the agreement should set out any salaries to be paid to the partners, whether interest will be paid on a partner’s initial capital contribution, and how profits and losses are to be shared among the partners (i.e., equally or unequally).
• Ownership of assets – the agreement should clearly list all the assets used by the business, and state whether they are owned by the partnership or by one of the partners.
• Decision-making – the agreement should state how decisions are to be taken in the partnership (i.e., will decisions be made by simple majority or will certain decisions be designated as requiring unanimity).
• Work input required – the agreement should set out the degree of commitment to the business expected of each partner (e.g., full time or part time). Occasionally, it may be appropriate to specify that the partner is not to be involved in any other business during the term of the partnership. Similarly, it may be helpful to specify the role each partner is expected to play.
• Termination – a limit should be placed on a partner’s right to terminate the partnership. This is usually done by requiring the leaving partner to give notice to terminate the agreement, and by specifying a notice period (e.g., six months). The agreement should also provide for the expulsion or retirement of a partner and how the remaining partners will pay for the leaving partner’s share of the business.

Tax considerations

Partnerships are taxed similarly to sole traders, meaning that the partners themselves are taxed on their share of the profits of the partnership.

Individuals in a partnership should consider their liability for: