In our last blog we talked about the difference between a limited company and a sole trader – and that provoked quite a response! If you missed it – catch it here. Today we look at problematic advice on partnerships and some of the pitfalls to avoid.
Partnerships are a very old concept and defined very loosely as ‘persons carrying on a business in common with a view of profit’ and only excludes those in an incorporated body (a limited company set up) or a group created by statute or Royal Charter (no, not you guys!) so covers everyone who is working jointly with someone else – and this is important – even if they didn’t intend to actually create a partnership.
So, you can create a partnership by accident (how weird is that…) without intention and indeed even if you have tried to avoid such a thing, and once created, partnerships can only be regulated in one of two ways:
- By a contract in writing – you have a Partnership Agreement that sets out how the partnership works and such matters as termination, dissolution, adding new partners, how you run the accounting processes etc. It can include restrictions on what partners can do as part of or as well as their work for the partnership, and after departure. They often run to many pages and can have complex structures dealing with departure of existing partners and additions of new partners in particular.
- In the absence of a contract in writing, or if your Partnership Agreement is silent on any aspect, then there’s some really bad news – you are subject to the Partnership Act 1890 – a comprehensive piece of legislation that imposes all sorts of rights and obligations on partners whether you like it or not. Given this Act was passed in the 19th Century you can imagine how clunky and very ‘not fit for purpose’ this is in the modern age. Pitfall to be avoided!!!!!
You will see often in contracts with freelancers or associates a clause that states specifically that no partnership is being created between the parties who would otherwise satisfy the very wide definition of a partnership – that’s why its there. You do not want to be in partnership with your freelancer assistants usually – and neither do they wish to be in that arrangement with you. Its important this clause features large in your freelancer contracts.
If you do need to go into business with other people, usually the simpler and cleaner way to do this is by shares in a limited company – far more flexibility and much easier to create and regulate what you do.
Here’s useful link about the minimum requirements for a partnership and how to run it, name it and adhere to your obligations.
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