When two or more people come together to carry on a business a partnership is formed. There does not need to be a formal partnership agreement and partnerships can be formed without people being aware of this. For this reason alone it is important to make sure that you know what you are doing and you get good advice if thinking of forming a partnership or going into business with someone else.
If a partnership is formed without undertaking any formalities it will be governed by the provisions of the Partnership Act 1890 and the provisions of the Act may not be what is wanted or adviseable. For this reason a particular partnership should have a partnership agreement tailored to its needs to govern the operation of the business.
As with a sole trader, each of your partners is personally liable for the business. This liability is not shared equally amongst you but operates so that each of you is responsible for all the business's liability. This is know as "joint and several liability".
In practice, this means that if you were to incur debts without the knowledge of your fellow partners, they would still be responsible personally for all those debts. The same applies the other way round and you will be similarly liable.
A partnership will be taxed on the basis that profits generated will be treated as the individual partners' income.
Some key issues to consider when forming a partnership are:
- what contributions each partner is to make in terms of finance or assets
- what proportion of the partnership profits each partner will be entitled to and when
- how the relationship between the individual partners is to be managed
These issues and others are best dealt with in a partnership agreement.
See also:
Partnership agreement
