Protecting Your Nest Egg (partnership edition)

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Protect your Nest Egg – partnership edition

Partnerships arise on a handshake, do you know what you should plan for though ?

Partnerships can seem an easy and simple way of getting into business with someone but if you don’t plan properly, there’s no simple way out.

Most of us will have done business at some point on a gentleman’s promise, which essentially means trusting in the person we’re doing business with. But just as you can’t tell what’s around the corner in your personal life, your business partner can’t either and one day, you just might not be his priority any more.

Entering into a written agreement may feel like a burden at the beginning of an exciting new venture but, deep down, you know that you need to plan for eventualities and you’re more likely to grow the business and remain on good terms if you are all clear from the outset. If you have nothing set down on paper, you will be relying on a creaky old piece of law called the Partnership Act 1890 and you won’t get to decide on the crucial stuff:

  • Recording cash going into the business ?
  • How is cash (profit and capital) to come out of the business ?
  • Who has responsibility for what in the business ?
  • Decision-making processes such as voting ?
  • What happens if one partner wants to leave, gets divorced or dies ?
  • Do you need to restrict what partners are doing outside of the partnership ?
  • What happens if the partnership is to be dissolved ?
  • Here are InHouse Legals’ top tips for thinking about the hard stuff up front and protecting your hard work:

    FOCUS…

    …on exactly how you and your partners see the end game. Are you in this to create value and sell the business or do you all want something to pass on to the next generation ? Do you want to restrict who can come in and what happens to someone’s share if they want to leave ? Are you all putting in equal amounts of time and money ?

    THINK…

    …about how you can reach an agreement that caters for all of your interests, so just like writing a will, you need to think about when things might not be so peachy and agree how you’re going to deal with those issues. If you established the partnership on a handshake and agree how it is going to work verbally, the worst situation you can get into when you need to rely on that agreement is “he said, she said” without nothing to point at.

    PREPARE…

    …for those business and life events which could cause the business to hiccup. You will be working hard to create a healthy turnover so you will want to to be sure that you’re doing it for your benefit. You simply need to create a “shopping list” of items that make the parnership fair for everyone, including the points highlighted in this blog. You can either all sign and date that shopping list or hand it to someone like us to draw up a more formal partnership agreement and alert you to any gaps or oversights.

    So what might happen you don’t have a partnership agreement ?

    Here are just a few examples:
    • In the absence of agreement to the contrary, a partner shares equally in the profits of the business irrespective of the amount of time or effort he or she has put into the business. So even if your partner hasn’t put an ounce of effort into building the business, they’re still entitled to an equal share of the profits.
    • A partner cannot retire. If one partner decides to leave or dies, the partnership has to be dissolved; the assets divided up and a new partnership (or other business) formed. Needless to say, this will be an expensive, time consuming and stressful process. It also means, once again, that a less than active partner can simply announce their retirement and effectively cash in on all your hard work.
    • A partner cannot be expelled; if this is necessary, the partnership must be dissolved and reformed, which bears many legal complications. So without an agreement they’re your partner, whether you like it or not!

    InHouse Legals provides expert advice and guidance advice and guidance on agreeing and constructing a workable partnership agreement that will put you on clear, firm ground with your business partners right from the get-go.

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    Vanessa Challess

    Vanessa Challess

    Managing Partner at InHouse Legals
    Vanessa is the founder and Managing Partner of InHouse Legals and Tiger Law. With years of experience as a litigation specialist, she founded IHL and Tiger to provide SME business owners with easier, more affordable access to the essential legal services they need as their business grows and develops. She blogs on a wide range of legal & HR issues with the goal of equipping entrepreneurs with no frills, easy to understand information to keep them on the right side of the law.
    Vanessa Challess

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