Self employed to partners

Glennn

Hi,

Just wondering the best way to go about going from self employed to partnership?

What is the best way to sort things financially? I have x amount in the bank, paypal & amazon. Do I take everything out and start from zero so we know where we stand? Everything going forward from x date will be split 50/50 income and expense.

paddyrg

Eek - 50/50 means stalemate will happen. One wants to expand into Asia, the other partner wants to concentrate on domestic market, both refuse to budge...big problem. One ends up bringing in 75% of the revenue, other goes on 75% of the holidays - resentment. One does all the bookkeeping late at night the other all the daytime revenue work - whose work is more valuable? Is it still 50/50? You get the picture. As opposed to starting from scratch, get the other partner to match the funds for your startup capital (otherwise why be a partnership in the first place if it isn't so you can afford joint assets you couldn't afford individually?).

If you have an uneven partnership (eg 51% vs 49%) then you can head off a load of these problems. You really need to sit down and discuss NOW whilst things are exciting and rosy what happens when someone is ill/dies/make a loss/gets bored/wants to expand/disagree about xyz/wants to borrow from the company whilst the other wants to invest/windup who owns what assets/etc. You have to concentrate on the bad stuff, then draw up a partners agreement. I strongly suggest you take legal advice.

Really stop and think why you're keen to go into partnership if you're currently doing OK on your own - you're giving away your market share in effect, what does the other partner bring? When partnerships go wrong, they go far wronger than being a sole trader. If the partnership borrows money/assets then both parties are liable for the whole of that liability - so one partner can syphon all the cash from the company, the other is left with all the debts, it's not pretty. Go into this with your eyes open, and consider other models - perhaps you stay self-employed and pay the other person a day rate on invoice when you need them?

Mistral001

Totally agree with the above. The longest lasting partnerships are those in which there is a junior partner and a senior one and it is not 50/50.

Forget about all those cowboy films where the spoils of the bank robbery is divided 50/50. That may work in that particular profession but in businesses a 50/50 split is very difficult to hold together.

there are exceptions of course. i once knew a firm that was 50/50 and lasted the test of time, but it probably did because both partners agreed to always have exactly the same model and age of personal cars as well as the same business car. They also agreed not to do extensions to their houses without both doing them.

Pennywise

Agree entirely with earlier posters. Think VERY carefully about this. I've been in accountancy for 30 years, and can say that the vast majority of 50/50 business partnerships fall apart within the first few years often resulting in crippling damage to the business and personal finances. You need to agree exactly what you'll both put into it and exactly what you'll get out of it under various scenarios. Also agree your exit routes before you even start. If possible, find a way of working together without being a formal legal partnership - i.e. two sole traders colaborating and invoicing each other as appropriate.

InsideInsurance

I am less doom and gloom than the others but in general they bring up a lot of good points about what needs to go into your partnership agreement such as how to settle disagreements, what happens if one party either wants to leave or is forced to leave (illness, death etc)

These are much more sensibly sorted out now and put into your partnership agreement than waiting for them to happen (and eventually at least one will). That doesnt mean the agreement cannot say a 50/50 split of profit as that is just one of the considerations.

I would also strongly suggest that you consider roles and how happy you are going to be. A close relative of mine formed a 3 way partnership, he was the hands on guy, there was a sales/ account manager chap and an accountant/ basic legals.

One guy spent 5 days a week working 9-5 in the office.
One guy spent 2-3 days travelling, normally "business class" and in offices or hotels and plenty of restaurants and the other 2-3 days doing 9-5 in their office
The final guy was working outside, normally 6am-8pm including travel which had to be by car towing a trailer of tools and after getting back home had to write up the reports etc

TBH, within the partnership it worked ok, the guys each did the job they liked and they were aware of their respective hours when they signed up but wives were another matter given 1 party worked by far the longest and actually brought in all the revenue. With other people though you could see it going a very different way with situation

Glennn

Thanks for the replies, obviously a lot has to be sorted out yet!

With the size of the business I don't really want to go to a legal firm to draw anything up so can a partnership agreement be done ourselves? Maybe a template to go off?

As we both have full time jobs nothing will be coming out of the business other than anything we lend to it. Any profit will be going back into the business.

All the comments so far have been noted though :T

sandraroffey

u will maybe need to see a solicitor to draw up a proper, legal partnership agreement laying out everything as YOU want it. remember that if one ducks out/defaults etc the other partner is equally liable.

paddyrg

Glennn wrote: »

...I don't really want to go to a legal firm to draw anything up so can a partnership agreement be done ourselves? Maybe a template to go off?

Honestly, you'd be bonkers to just go with something you found online - this is the foundation of you becoming jointly and severally liable for one anothers working lives. This underpins the whole business. This is a marriage, but a marriage with a complex pre-nuptial agreement.

If you're serious about this (and you do need to be as serious as getting married TBH) then spend some money. There are too many ways this could blow up in your face if you aren't totally behind it. It really does happen.

A friend's father was a partnership in a law practice - turned out his partner developed tastes beyond his share, and bled the company completely dry then ran away. It took him around 5 years to clear up the mess it left, and much longer to start saving again for his own pension after having to bail out the business. These were 2 experienced solicitors, mind, so consider when we mere mortals mess up!!

If you're unsure about spending money on real advice, you're too unsure to form a partnership IMHO.

Annisele

I agree with the others; you absolutely can't skimp on the legal advice for this.

And don't be tempted to go into business without a written an agreement - or you'll probably end up with an agreement implied by the Partnership Act 1890. I do mean 1890 - it's a very old piece of legislation - and it's extremely unlikely you'll want all of that.

You say that all profit will be going back into the business - but presumably that's not your long term strategy?

How come you're not just taking on the other guy as an employee?