10 February 2016
How to have a successful business partnership
Many people who start a business do so with a friend or relative. Often they just start producing or selling something as an extension of this relationship. There are many benefits of going into business with a friend or relative but it can also lead to serious problems or disputes further down the road regardless of whether the business is successful or not. Here’s some advice on what to avoid and what can make your relationship last in business.
The problem with partnerships
The problem with partnerships is that they are without limited liability. As a result should debts mount the partners may be considered jointly and individually liable.
What this means in practice is that should, for any reason, your partner have no cash or assets with which to pay creditors, the whole debt may rest on your shoulders. This sometimes occurs after a personal fallout which makes paying the entire debt burden totally unacceptable to the person left carrying the can. In my experience, very few relationships survive this scenario intact.
Unless you have a very good reason for doing so, I would advise against partnerships of this type.
Form a limited company instead
Instead it's better to form a limited company and divide the shares equally.
The modern Limited Liability Company was first created in New York in 1811 as the American Government at that time felt potential investors were being deterred from investing simply because all their assets were at risk. In England, The Limited Liability Act of 1855 achieved much the same thing.
Prior to this date, a merchant ship which sank in the Pacific Ocean meant the merchant owner could lose his home as well as his or her business to creditors.
By setting up a Limited Liability Company business people could protect assets which were effectively beyond those declared as assets of the company being formed. This enabled people to invest say a thousand pounds into a venture, without risking their homes or other investments. Any potential loss was limited to the issued share capital of that particular investment.
Put more simply, say you and a friend want to produce honey and put £1000 each into the venture. If you do this through a partnership and the business fails you will be jointly liable for its debts to the full extent of your personal assets.
If, for instance, the business traded well for a while and then went belly up and owed £50,000 to creditors, you would each separately liable for that £50,000! This doesn't mean that you owe £100, 000 of course just that, should your partner not have his or her share, you will have to pay the full amount. You are jointly and severally liable for the full extent of the debt. The creditors/administrator won't care where it comes from.
Don't fall into this trap! Create a Limited Liability Company at the cost of about £100 and divide the shares as you see fit.
Often lenders insist on personal guarantees which circumvent the protection you should enjoy as shareholders in a limited company.
It is very important to avoid giving personal guarantees where possible, but where it is prudent to do so insist on an agreed limit to this extra liability. Unlimited personal guarantees leave you very vulnerable to potentially unfair financial pressure from lenders, should your investment go wrong.
Seek proper assistance
The above is not detailed advice and is only general observation, you should always take proper legal advice from a lawyer or qualified chartered or certified accountant before signing company formation, partnership agreements, or other binding documentation.
Loan agreements are very important to get right, so proceed with extreme caution and avoid putting your home at risk wherever possible, particularly if you are elderly or have a young family.
Always limit your liability where possible, but remember when borrowing money that that the money belongs to someone else so paying it back, as agreed, is the morally right thing to do.
However, going into business with someone can provide many rewards too. It’s likely you already know the person really well and you will get the chance to do something you love with someone you care about which can be a lot of fun (despite the hard work involved!). It is, however, important that you get the right advice to make sure your business is set up properly. The Business & IP Centre regularly run workshops and one-to-ones covering a huge range of topics – of particular relevance to this article is a How to register as a limited company being held on Thu 11 Feb 2016.
Stephen Fear on behalf of the Business & IP Centre