In the book “Partnering Intelligence”, the author writes that about 80% of the partnerships worldwide end up in failure. It is the biggest reason why partnerships make up only 7.5% of the total businesses in the UK, even though it is amongst the most prominent structures used by businesses in the world of startups.
If you dive deeper, you will find out that most of these partnerships fail due to disagreements or disputes and a lack of clarity. To avoid such a fate and increase the chances of survival for a partnership business, it is crucial that you draw up a partnership deed for your business.
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What Is A Partnership Deed?
A partnership deed, also known as a partnership agreement, is a written document between two or more parties looking to join a business venture. A partnership deed is a legally binding document with strict legal implications if breached.
The start of a business venture is always exciting. In the urgency of getting a partnership up and running, we sometimes forget to account for the possibility of failure and what the implications of failure are. A partnership deed is an important document that states all the possibilities and the course of action you would take if they do take place.
A partnership deed is a plan for the future of your business that helps you be prepared for any uncertainties that may arise. Although the document is not necessary for the formation of a partnership, According to the Partnership Act 1890, you can form a partnership without any legal proceedings. This partnership is known as a “Partnership At Will”.
What Is A Partnership
According to the Partnership Act 1890, the definition of a partnership is very broad. It states that a partnership is formed when,
- There are two or more individuals involved in the business.
- They have been carrying on business together for some time.
- With earning a profit as their focus.
So any business that fulfills these criteria can be considered a partnership under the act. To make sure the partnership runs smoothly, you must have a set of rules and guidelines provided to you by the partnership deed.
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What Does A Partnership Deed Include?
A partnership deed is a comprehensive document containing all the information regarding your business and the partners involved. It includes:
Name of the Business
The name of your business is your business identity and is one of the most important aspects of the partnership deed. It is the name people in the industry would recognise your business with.
Nature of the Business
What industry are you planning on entering, and what is the nature of your business? Are you planning on manufacturing goods, or do you intend to work as a distributor? Are you about to open up a retail store, or do you import or export goods?
Details of the Partners
Your partnership deed also needs to include all the details of your partners. These details include their names, home addresses, and other particulars that might be necessary at the time of drawing the deed.
Nominated Partners
After adding the partner’s details, you need to specify who the nominated partner would be. The nominated partner will be responsible for the understanding and filing of taxes and the maintenance of records. The remuneration of the nominated partner for his services will also need to be defined.
Business Bank Accounts and their Management
In the partnership deed, you would also need to decide on the bank you would be working with and the signatory authority of the bank account. These partners would be liable for the management of the bank accounts and would be accountable for the check and balance.
Witnesses of the Agreement
As a partnership deed is a legal document, witnesses must be present at the signing. The number of witnesses required differs depending upon the law of the state you are starting the business.
Authority of the Partners
When drawing up the partnership deed, the partners’ binding authority must also be disclosed. The authority of a partner to bind the business to a debt or other forms of obligations needs to be decided beforehand to avoid costly risks.
Decision-Making Process
In a partnership, many business decisions would be involved that would require proactive actions and decision-making. To ensure the smooth sailing of your business, you must decide upon the process of decision-making at the time of drawing up the partnership deed. It can be anything from a voting system to a single partner holding all the authority.
Share of the Partners in Capital
A business needs startup capital, which the partners would most likely invest. In the partnership deed, you need to specify what percentage of the capital was brought in by which partner.
Additional Capital during the Business Lifetime
The procedure needs to be defined for when new capital is introduced into the business. How will it affect the profit and loss sharing of the business and the treatment provided to the investor?
Sharing of Profits and Losses
The partner’s profit and loss sharing ratio must be defined at the beginning of the partnership and written up in the partnership deed. Your partnership accountants will be able to advise more.
Salary of Partners
If a partner is working in the business as well beyond the scope of an owner, their remuneration needs to be decided upon and written in the partnership deed. The partner will then be liable for their responsibilities as they receive an appropriate salary for it.
Drawings from the business
If you are looking to take out drawings from the business, you need to define the following terms,
- What percentage of the profits can be taken out from the business yearly?
- What is the threshold a partner can withdraw each month?
Loans and Interest
If your business plans on giving out loans in the future, you need to decide upon the percentage of the profits that would be given out as a loan and the interest charged upon the loan amount.ย
Duration of the Partnership
If the partnership is formed to undertake a specific project, the duration of the partnership needs to be decided upon in the partnership deed. If the partnership has been formed for an undefined period, that needs to be disclosed in the deed.
Roles and Responsibilities of Partners
Every partner in the business has a particular role and has to undertake duties and responsibilities. The role of your partners needs to be clearly defined in the partnership agreement. Each partner is responsible for completing their duties and the fulfillment of their responsibilities.
Rules of Admission and Withdrawal of Partners
One of the biggest challenges a partnership faces is the entry or exit of a partner, as it leaves the entire process in chaos. It is crucial to set up clauses and treatments you would undertake if the business takes in a new partner or when an old partner is leaving.
Process of Dissolution
The hardest part of any business is the dissolution. Your deed needs to clarify the treatment of assets and liability in case of dissolution to make the partner’s process easier. It will allow the partners to dissolve smoothly and take care of the accounts, payables, and debts.ย
Treatment in case of retirement, death, or insolvency of a partner
Similar to the case of dissolution, if such a situation arises where a partner cannot continue with the partnership due to retirement, death, or insolvency, your partnership deed acts as a ground rule based on which the settlement of accounts is conducted.
Valuation of Goodwill
The approach toward the valuation of goodwill also needs to be mentioned in the partnership deed. You can take the whole company approach, simple multiple approach, turnover approach, or discounted cash flow approach. Whatever method you opt for, you would have to stick by it throughout the lifetime of your partnership or till a new deed is made with the consent of all partners.
How to Register a Business Partnership?
The process of registering a partnership is very straightforward. All you need to do is,
- Head over to the government portal and navigate to the partnership registration.
- Sign in using your government gateway ID.
- Here you would need to enter all the relevant information regarding your partnership, including the names and addresses of partners, the nature of the business, and a few other pieces of information.
- To set up the partnership, you need to fill in the SA400 form to register the partnership for self-assessment.
- Afterwards, the partners need to also register for self-assessment and NIC class 2 with the help of the SA401 form.
- Lastly, you would need to select the nominated partner responsible for filing taxes with the HMRC on behalf of the partnership.ย
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Why Do You Need A Partnership deed?
A partnership deed can be a very helpful document for managing a partnership over a long period. It is because:
It protects your business against disagreements
As one of the most important parts of a partnership deed is the dissolving of disagreements and squabbles amongst the partners, the partnership deed helps you mitigate the effects of a broken relationship between two or more parties involved in conducting the business together, as it clearly states the course of action in case such a situation arises.
It promotes your Business
Partnership deed promotes your business by ensuring that no single person is burdened with the workload and that everyone is performing their set duties and responsibilities appropriately. It is done by ensuring that the roles and responsibilities of every individual are clearly defined during the drawing up of your deed and the consequences they would face if they fail to meet those roles and responsibilities.
It focuses on the Interest of the Business rather than Individual Interests.
A partnership deed ensures that the partners’ interests stay in line with the interest of the business, and no personal agenda is formed among the involved parties. It is done by setting up legal consequences for anyone who tries to harm the partnership to get personal gains and by defining the investments and earnings of every partner beforehand.
What Happens When A Partner Doesn’t Follow The Agreement?
When starting a partnership, the biggest concern the involved parties might have would be the implications of a partner leaving the partnership legally or illegally. To ensure that your business is minimally affected by the sudden exit of a partner, consider the following when drawing up your partnership agreement.
- What happens if a partner retires?
- What happens in the event of the death of a partner?
- How will you manage things if a partner goes bankrupt?
- What are the consequences in case of general misconduct by a partner?
Absence of a Partnership Deed
If All the partners mutually agree not to adopt a partnership deed, however, the following rules will apply:
- Profit and Loss will be divided equally among partners irrespective of capital contribution.
- No partner is entitled to any salary or commission.ย
- No interest to be charged on Drawings.ย
- Interest is not allowed on capital to the partners.ย
- If partners mutually agree on getting a loan for the business, they will get 6% p.a. interest.
- Mutual consent of present partners is required to add a new partner to the business.
Conclusion
To ensure your hard work and efforts do not waste and get the most out of your business venture, you must draw up a comprehensive partnership deed. For this purpose, Clear House Accountants have partnered up with UK’s leading legal advisors at Sparqa Legal to ensure that our clients can protect themselves from uncertainties.
