Lawlink – Partnership problems

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Q: I lost my regular job during the pandemic and set up a small business with a good friend of mine. Initially it was more to keep us occupied, but it has since grown and grown. I do the bulk of the work and my friend does some administrative tasks. It has started to make real money and we are now thinking about becoming more formal. My friend does not want to have this as his full-time job, but it will certainly be my full-time job. He has said that he would be open to being bought out for his share of the business, as he knows I am more serious about this. Can you advise me on the best way to proceed?

A: The first thing you should do is consider what form you wish your business to take. You could set up as a limited liability company, a partnership, or as a sole trader (if you were to buy out your friend).

Generally speaking, most businesses proceed by way of limited liability company, but you should speak with your solicitor and accountant to confirm that this is indeed the best way to move forward for you.

You and your friend would now be legally classed as a partnership. If you plan to continue this way, it is highly advisable that you enter into a partnership agreement.

This would set out what your contributions to the business are to be, what responsibilities you have, your ownership shares, and what might happen if one or either of you want to leave the partnership or dies etc.

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You should note that operating as a partnership means that you are both fully personally liable for any business expenses, loans, taxes etc.

Operating as a limited liability company has certain cost overheads. For example, you have to file annual accounts, have regular company meeting etc. However, as the name implies, your liability is limited in that you are generally only liable to lose your investment.

Again, if you and your friend are going to continue together then your solicitor should draw up a shareholders agreement to regulate the relationship between you both.

There is certainly no difficulty with regard to buying your friend’s share of the business. If you cannot come to final agreement on a figure, your solicitor can point you towards experts that value businesses for the purposes of sale. Be warned, however the cost of such services can sometimes be prohibitive.

Again, any agreement to buy out your friend’s interest should be drafted by your solicitor and each of you should have the chance to take your own legal advice.

Regardless of whatever format you choose for your business, you would be well advised to take all necessary advices from your solicitor as well as your accountant to ensure that matters are set up in a sensible and tax efficient manner.