October 30th, 2012 / Insight posted in

Risk of going into partnership

JJ writes: I have been a sole trader for years but am now considering taking on another person and trading as a partnership. However, I am unsure about the risks of such an arrangement and how easy it would be to part company with the person if things do not work out. How can I protect myself?

Careful consideration needs to be given, and professional advice taken, before entering into any form of partnership as there are a number of pitfalls, writes Jon Sutcliffe, partner at Kingston Smith LLP. This is because partners are jointly and severally responsible for the liabilities of the partnership.

Management of many issues comes down to trust and good communication between the partners, but it is always advisable to have a formal written agreement to set out the roles of the partners and the limits of their authority. This is particularly the case as partnership law will imply certain terms unless the partners specifically agree otherwise.

Where there are only two partners and you wish to part company, the partnership will need to be dissolved. A proper partnership agreement should set out the procedure for (and consequences of) dissolving the partnership, which can be instigated by either party.

The agreement can also deal with other matters. These would normally include the division of profits between the partners (without an agreement this would be deemed to be in equal shares, in respect of both income and capital), the extent to which partners are required to contribute to losses, their respective capital commitments, the ownership of partnership property, and any restrictions on the partners’ ability to engage in other business interests if these could be detrimental to the partnership’s interests.