Quick guide for how to form a partnership

About to form a partnership? Here a quick ‘how to’ guide.
Partners in a business share in both the responsibilities of running the business and the profits or losses that it makes. However, precise rights and responsibilities depend on:

• the type of partner
• what the partnership agreement says

There are three broad types of partner:

• General partners
General partners invest in the business, take part in running it and share in its profits. Each general partner is fully liable for any debts. This means that they could lose more than their initial investment in the business if it runs into trouble, and that their personal assets could be at risk. Every partnership must have at least one general partner.

• Sleeping or dormant partners
Sleeping partners invest money in the business and share in its profits, but do not take part in running it. They too, are fully liable for the partnership’s debts.

• Companies
Companies can be officers of a partnership and have the same rights and responsibilities as other partners, but they also have some additional tax matters and reporting obligations.

The partnership agreement
A deed of partnership or partnership agreement is a legally binding agreement between the partners. It sets the terms of partnership, detailing how it will be run and the rights and duties of the partners.

It’s not necessary to have a deed of partnership, but it’s a good idea, as it will help to avoid misunderstandings and disputes between partners in the future. If the partnership does not have a deed, it will be governed by the terms of the Partnership Act 1890 which does not offer solutions to many of the problems that can arise (exit strategies and dissolution for example) and may not suit the way that you and your partners want to work together.

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