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Many company advisors and professionals consider tax implications, cost of accounting and other practicalities in advising clients and businesses on their trading structure. It is often easier for a Partnership to raise much needed capital for start-up business. Some partnerships form naturally between families and even close friends. Like many relationships, they work very well until the cracks begin to show and as in life - the break-up of a business relationship can be just as messy.

In this article Rachel Fowler explores what people need to consider when trading as a Partnership.

Joint and Several Liability
Partners are jointly and severally liable for any outstanding debts of the Partnership. This means that creditors can pursue the personal estate of each of the Partners for the full liabilities of the Partnership, regardless of their share of the debt.  Put simply, each Partner effectively personally guarantees all Partnership liabilities.

It is important that Partners are open, honest and aware of what is at stake. If one party feels they have more to lose than others, tensions and pressures often mount.  The Partnership structure often shares decision making and control evenly amongst Partners.  This negates the impact that a bad decision by the Partnership could have on an individual with a lot to lose.

Insolvency options
In the absence of a formal process, all Partners must agree how to deal with financial pressures.  This can be a challenge when parties are working to protect their own financial position.  Typically a team of advisors will work to thrash out an agreement and negotiate a way forward for the Partnership and individual Partners. 

Partnership insolvency is complex and can be problematic.  Creditors often find it more difficult to enforce against and someone will always feel aggrieved, particularly if they have to contribute more than their fellow Partners.  On a plus, given the complexity and the personal aspect of the business, creditors can be more patient in waiting for a proposal and may be more willing to accept a well-structured and fair offer.  

A Partnership Agreement
A bespoke Partnership agreement will clearly set-out the boundaries within which Partners will act.  Taking time to consider individuals roles, responsibility and voting powers could save a lot of headaches down the line.  It can include details on the voting powers of Partners and steps to take should the Partnership face financial pressures.  Oftenwith the intital pressures and challenges of off the ground entrepreneurs often neglect this important the paperwork.  In the absence of an agreement the Partnership Act of 1890 will apply, which did not foresee the challenges faced by the modern day business. Shauna McStravick, our internal legal advisor helps clients discuss and document these agreements.

Incorporate
If individual Partners are not comfortable with the personal liability and risk of action against themselves, incorporation should be considered.  A Limited Company is a more complex business structure than a Partnership, but the liability of the owners (shareholders) of the business is limited to their capital investment.  Incorporating a successful Partnership can have tax advantages which our tax team would be happy to discuss with you.
 

The limited liability comes with its own costs including additional statutory reporting and compliance requirements such as the filing of accounts at Companies Registry.  If you consider what might be at risk and weigh up the tax position you might just find out that it’s worth it.