When you set up a partnership there are a couple of important legal considerations. Therefore it is essential that you get legal advice from a solicitor, who can help you with the following:
Create a formal Partnership Agreement
In legal terms called a ‘deed of partnership’, which will include:
The purpose and objectives of the partnership
The amount of capital put in by each partner, which will include money, equipment and other capital goods. It is good practice to have an up-to-date list of who owns which piece of equipment and who has contributed capital to the company. In case of splitting up with your partner each company asset will need to be revalued, and individual partners will need to split the assets or buy the other partner out.
The role and responsibilities of each partner. It is good practice to draft a job description for each partner and review that annually.
The apportionment of profits and losses (often depending on how much capital or time is provided). Gets or pays every partner the same (50/50) and if not how is this split and why?
The exit strategy: What are the arrangements in case of dissolving the company, including the retirement, when somebody wants to leave, and death or long-term illness of a partner
Who owns the trading name? If you use another brand name who owns this, and would it be possible to use this name outside or after the partnership has been dissolved?
Who owns the intellectual property? Such as copyright and trade marks. Is there a joint copyright or does one partner own ‘more’ of the copyright than others? In particular, when royalties are being paid due to patents this is an extremely important topic as it has got major financial implications.
Exclusivity: Is a partner allowed to work on other individual projects outside of the partnership, which will not contribute to the income of the partnership?
Who does the management of the finances, bank account, signing of cheques and orders.
How are hours of work and holidays allocated?
What happens if you disagree? Arrangement for arbitration in the event of disagreement.
It is important to get this agreed at the beginning of your business relationship to avoid any major emotional and financial problems later on. Especially if the people you work with are your friends you need to draft an agreement that specifies the expectations of the partnership and the above mentioned aspects to avoid potential problems. People often think very differently about money and this can cause majore emotional problems.
What will the business form be?
Partnerships are incorporated (like sole traders, and unlike incorporated limited companies). This means that your personally (and as a partnership jointly) responsible for any debts owed. Partnerships have to be registered with HMRC.
Since 200 there is a new legal business form available to partnerships:
Limited Liability Partnerships (LLPs)
They share many of the features of normal partnerships, but provide more organisational flexibility and limited personal liability than normal partnerships. They are a bit more complex to administer, and there are more rules about internal administration and organisation. LLPs are especially attractive to professional partnerships such as graphic designers, lawyers and accountants.
An LLP offers reduced personal responsibility for business debts. Unlike a normal partnership, the LLP itself is responsible for any debts that it runs up, not the individual partners.
For tax purposes LLPs are treated as a business run by partners rather than as a Limited company. Partners in an LLP are liable to pay the flat rate Class 2 National Insurance contributions (NICs) in the same way as self-employed people, and income tax and Class 4 NICs on their share of the partnership profits. The LLP itself will not be liable to corporation tax. If you want to form a LLP you must register under the Limited Liability Partnership Act 2000 with Companies House.
For more information about different legal business forms check out the Business Link website.
What about tax?
Being in a partnership is often more efficient for paying tax, but you would need to get advice from a financial adviser or accountant. Although only one partner needs to return the partnership self-assessment form, both partners are equally liable to paying income tax and any penalties occurred.
Trading under a different name
If the partnership is trading under a name other than that of the owner(s) then you must display the name and address of the owner(s), and an address for each at which legal documents can be served.
You can find out more about the advantages and disadvantages of creative partnerships here. Post any additional comments or questions about partnership below, or send an email to The Design Doctor for confidential advice.