Business partnerships start with an innovative, motivated duo working together for a shared vision. But whether it’s money issues, an imbalance in responsibilities or disagreements over decision-making, what started as a promising venture can quickly turn sour.
Nobody wants a partnership disaster. It’s stressful, uncomfortable and sometimes expensive. Here are a few tips to prevent conflict with your business partner.
Draft a partnership agreement
Drafting a partnership agreement gives you and your business partner(s) the opportunity to clarify how you all would like to run the business and share the profits.
You’ve probably discussed these agreements, but formalising them in a written document provides everyone with clarity and prevents conflicts especially if memories differ later down the line.
The legal benefits
A formal partnership agreement has a number of legal and financial benefits. Legally, you have evidence of what the partners agreed, which might include each partner’s responsibilities and the way in which they’re expected to conduct themselves. If one partner isn’t pulling their weight or acts irresponsibly, you may have a legal remedy for breach of contract.
Without a formal contract, you’d have to rely on an oral agreement, or piece together various emails to work out what was agreed. It’s more difficult to prove a case this way, however, and risks higher legal fees and a more uncertain outcome.
Financial and operational benefits
Some partners may contribute more capital than others to set up the business which can be reflected by how profits are shared between partners.
But without a formal agreement, you run the risk of reverting to the archaic provisions of the Partnership Act 1890, according to which all profits will be shared equally.
The Partnership Act also allows any partner to dissolve the partnership at any time. If you want control over how long your partnership lasts, or how to move on from the partnership, you need to articulate that in your agreement.
Formalities for family businesses
But how do you prevent conflict in a family business? Do you still need a formal agreement?
Each family business will have its own dynamics and ways of working, but it’s still sensible to have key mechanics set out in an agreement.
By nature, disagreements within a family business can be more emotional than those of a regular partnership relationship. Therefore, the clarity of a formal document can take the heat out of disagreements.
Your agreement can set out policies on complex issues such as salaries, dividends and the extent to which spouses and in-laws become involved.
As your business grows, you’ll need a defined structure that accommodates new joiners outside of the family. Such forethought will assist you with succession planning and what happens when you eventually move on from the business.
Where to start
If you’re setting up your business, or you’ve been in business without a partnership agreement, we can help you begin. We’ll make sure you cover all bases and we can advise you on key aspects such as profit-sharing arrangements and business tax.
You’ll need lawyers to draft your agreement, and we can point you in the right direction. Get in touch to make a start.
Alistair Allcock
Alistair AllcockAli has a wide range of experience within the accounts and audit areas, drawing on his experiences from working for both large and mid-tiered practices. Find out more about Ali here.