Partnership vs collaboration (UK): liability, profit sharing and legal structure explained

Getting this wrong can make you financially responsible for your business partner's liabilities. The difference between a partnership and a collaboration comes down to this: a collaboration is purely a contract between separate businesses, whereas a partnership can make you jointly liable with your partner. This page walks through the three main differences and the clauses your agreement needs either way.

Collaboration agreement vs partnership

A collaboration is purely contractual. The only thing that binds the two parties, usually, is the collaboration agreement. Two businesses agree to work together on something, for example creating a new product, and the contract defines the whole relationship. Nothing new is created, no new entity is registered, and nobody becomes responsible for the other's business. Typical examples are two brands producing a joint product line, or a manufacturer and a designer developing something together, where each keeps running its own company throughout.

Partnerships are more complex, partly because there are three main kinds: the general partnership, the limited partnership and the limited liability partnership. I cover the three in what is a partnership. For simplicity, this comparison focuses on the general partnership. That is a partnership that is not registered at Companies House and in which the members, the partners, have unlimited liability. It is the simplest form of partnership, and the one people fall into without meaning to, because it can arise from the way two people conduct business together rather than from any document they sign.

Liability: partnership vs collaboration

The first key difference is liability, which is the reason this distinction matters so much.

• Collaboration. Liability is split according to the collaboration agreement. Usually, where two businesses come together to create a new product, each business is responsible for a specific part of the collaboration and is liable for that part. If your part of the project fails, that is your liability; if theirs does, it is theirs.
• General partnership. It depends on the kind of partnership, but in a general partnership the starting point is that each partner shares the liabilities 50/50, assuming two partners. It does not matter where those liabilities came from or who incurred them. You can draft a partnership agreement that specifies otherwise, but without one, the default applies.

This is the difference that can hurt. In a collaboration you are liable for what you do. In a general partnership without an agreement, you are liable for half of what your partner does too. If you are collaborating with another business and do not want to be exposed to its debts, make sure the paperwork and the way you present yourselves to the outside world reflect a collaboration, not a partnership.

Profit sharing: partnership vs collaboration

The second difference is sharing of profits, and the pattern is the same.

• Collaboration. Again, it is purely contractual. The profits are shared according to the collaboration agreement, whatever split the parties negotiated.
• General partnership. As with liabilities, the starting point is that if there are two partners, the profits are shared 50/50. The agreement can change that, but the default is an equal split regardless of contribution.

The practical difference is where the answer comes from. In a collaboration there is no default to fall back on, so the agreement has to deal with profits or there is nothing to go on. In a general partnership the law supplies a default that may not match what the partners actually intended.

Separate legal entity? Partnership vs LLP

The third difference is the legal structure of the relationship.

• Collaboration. There is only a contract between the two parties. The two parties remain separate legal entities, whether they are businesses or natural persons, meaning individual human beings. The collaboration itself has no legal personality.
• Partnership. It very much depends on the kind of partnership. A limited liability partnership, an LLP, is recognised as a separate legal entity, just as a limited company would be. A general partnership is not: it is simply the partners themselves.

So if being a separate legal entity matters to you, for example because you want the business to hold contracts and assets in its own name, a general partnership will not give you that, but an LLP or a limited company will. A collaboration never will, because there is no new business at all, only two existing ones working together under a contract.

Key clauses for partnership and collaboration

My top tip for avoiding legal issues is to have a strong contract in place, whether that is a partnership agreement or a collaboration agreement. Three points to get right, whichever document you are using:

• Match the contract to the relationship. Make sure the contract is suitable for the kind of relationship you have chosen. A collaboration needs a collaboration agreement, not a partnership agreement, and vice versa. Using the wrong document can blur the line between the two and leave you with obligations you did not intend. I have seen "collaborations" documented with language about partners and shared profits that read, to an outsider, exactly like a partnership.
• Profits and liabilities. When drafting the contract, set out exactly how profits and liabilities are to be shared between the business partners. Do not leave it to the default position, and do not assume the other side has the same split in mind as you do.
• Obligations and deliverables. Include specific obligations and responsibilities on each party, or specific deliverables. This is especially important in a collaboration, where each party is typically responsible for a defined part of the project and the contract is the only thing that defines it.

In my experience the arrangements that go wrong are the ones where the parties agreed to "work together" and never wrote down who was doing what, who was paying for what, or how the proceeds were to be divided.

Next steps

If you are leaning towards a collaboration, have a collaboration agreement drafted that keeps each party liable for its own part of the project, sets out deliverables clearly and makes it plain that no partnership is being created. If you are leaning towards a partnership, which is typically a long-term relationship, decide which of the three kinds suits you and get a partnership agreement in place before you start trading together. A corporate solicitor can help you choose between the vehicles and draft the right document.