Firstly my caveat to this article. This is not legal advice, always consult a solicitor when drawing up agreements, it is only a summary of some of the experience we have gained in working with people setting up a business. It's there to make you think and hopefully help you.
We get quite a few questions about how two people (or more) should divide up the responsibilities and rewards of a business. What needs documenting, or not. Is it necessary to write anything down at all - can't we just get on with it?
For simplicity I will refer to a business that just two people may be thinking of setting up together. The basic principals apply just as much to businesses of more than two partners.
Whether forming a Limited Company or a Limited Liability Partnership, you will each be bringing value to a business. That may be specialist skills, business contacts or equity. These all have a worth and you must decide based upon your judgement what that worth is. Let me give you some examples:
- If it is clearly 60% being contributed by one person (ie bringing contacts, most of the money and skills) and 40% to the other (bringing skills, a little funding and some contacts only) then the agreement could be arranged such that 60% of the shares are allocated to the former and 40% to the latter. When profit bonuses or dividends are being distributed they would be divided in that way. However, because both are working full-time on the business they might both be on the same basic salary.
- This is better than picking out specific areas that one gets the money from and one doesn't. Can you imagine the situation where a partner spends all his time and some of yours, only on the area making money for him! A partnership means teamwork.
- I know of one business (in this case set up as a Limited Company) so that each partner has equal shares. Therefore each gets an equal dividend from the shares (profits). They also decided to pay each of the four partners the same, even though one is the Managing Director. They all bring different skills and contacts, but decided to share the success evenly. This allows for more team work. You could do the same in a Limited Liability Partnership if you feel the effort and what's brought to the table balances out, only there you'd agree how the profits (since no share certificates) are allocated.
Below a few considerations that you should include in your thinking and it would save arguments later to include in a document, such as a business partnership agreement, you both sign. It doesn't have to be done in a sense of "mistrust" but in a sense of being professional and business-like. Believe me, you will both be pleased there are no misunderstandings later.
- partners duties
- working hours and holidays
- decision-making procedures
- business premises
- cars
- profit-sharing arrangements, and drawings on account
- partnership capital (and interest arrangements)
- banking and financial arrangements
- accounting arrangements
- making provision for tax payments
- partner retirement procedures
- death of a partner
- providing for partners' retirements and dependants
- disability of a partner
- establishing the right to expel a partner
- what if a partner wants to leave
- arbitration for unresolved disputes
There may be others that you can think of that could be included, but now at least you are beginning to see how it all should work.
