October 29th, 2012 / Insight posted in

Clarity is vital in a partnership

DS writes: I am setting up in business with another person and we intend to have equal shares. However, he is putting up all the capital, which we expect to be £45,000. I am keen that we put in place whatever measures are sensible to protect and reward this additional investment so that in all other respects we can maintain equal shares in what we put into the business and what we take out from it. How should we deal with the capital?

It is important to bring clarity to a business partnership at the outset to avoid disputes further down the line, writes Jon Dawson, partner at Kingston Smith LLP. It is not clear if your business has been formed yet, but you could establish it as a partnership or a limited company, depending on which works better commercially and in terms of tax efficiency. Either way, similar principles apply.

You could treat your partner’s capital as a loan to the business, which then pays a commercial rate of interest to your partner and agree repayment terms while making sure there is enough working capital to continue trading. This leaves all the risk associated with the loan with your business partner.

Another solution would be for your partner to privately lend you half of the capital so that you each contribute an equal amount to the business and share the risk if the business does not work out. You would have to agree interest and repayment terms for your share of the loan but you could fund this from your future income.

The loans can be left in place or repaid over time, as long as the business has enough working capital to continue trading.

Either way, you should document the agreed terms in the partnership agreement or, in the case of a company, the shareholder agreement.