Business partnerships explained: what they are, why people use them and the agreement

Are you curious about the legal implications of a business partnership? In short, a partnership is two or more people coming together to make a profit, it can take several legal forms, and the document that governs it needs to answer three questions: how profits and losses are shared, what happens when a partner dies, and which decisions need everyone's agreement. Here is the business partnership from a legal perspective.

What is a business partnership?

Typically, a business partnership is where two or more people come together with a view to making a profit. That is the essence of it. Two people who start trading together with the aim of making money can find themselves in a partnership whether or not they have signed anything.

Benefits of a business partnership

Usually people go into partnership for one of three reasons:

• To complement each other's skills. One partner brings what the other lacks.
• To minimise risk. Risk is spread across multiple partners rather than carried by one person.
• To increase capital. Having multiple partners contribute money increases the amount of capital the business has available to it.

Types of business partnership

There are many different forms that a business partnership can take. There are three main kinds of partnership in the UK, the general partnership, the limited partnership and the limited liability partnership, and the relationship can also be structured as a collaboration or a joint venture, to name a few. Each carries different consequences for liability and registration, which I cover in what is a partnership and the advantages and disadvantages of partnerships.

What to include in a partnership agreement

Whichever form you choose, the partnership agreement is where the legal protection sits. These are the three things I would make sure it includes.

• How profits and losses are shared. For example, are profits and losses going to be shared equally amongst the partners, or on some other basis? Write it down.
• Whether the partnership dissolves on a partner's death. Decide whether the partnership is supposed to dissolve, meaning cease to exist, as soon as one of the partners dies. Keep in mind that this is the standard position when it comes to general partnerships, so if you want the business to carry on, the agreement needs to say so.
• Decisions that need all partners to agree. Set out the kinds of decisions that should require all of the partners to be in agreement before they are taken, so that no single partner can commit the business to something the others never approved.

For the wider list of provisions you would expect to find, see contents of a partnership deed, and for the drafting process see how to write a business partnership agreement.

Next steps

If you are going into business with someone, decide which form of partnership suits you and then get a written agreement in place covering profit and loss sharing, death of a partner and the decisions that need unanimous agreement. Speak to a corporate solicitor if you are unsure which structure fits or what the agreement should say.