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Breaking up is hard to do

Written by Adam Pescod on Tuesday, 05 November 2013. Posted in Commercial law, Legal

Whilst business partners may go into a new venture with the best intentions, differences of opinion may often threaten to become terminal. Preparing for such an eventuality from the start is therefore essential

Breaking up is hard to do

Going into business with a close friend or acquaintance is usually an endeavour laced with excitement. Despite the numerous challenges that are sure to arise along the way, there is ultimately comfort in the thought that you will not have to overcome them alone, but with the help of your fellow business partner or partners.

However, what is often overlooked are the components of the business partnership that are most likely to bring the whole thing to its knees: the very people who set it up. For, as much as one partner may think their vision for the enterprise is shared by their compatriots, there may come a point when they wish to go in a direction that isn’t greeted with universal approval. Alternatively, an untimely incident could result in a seemingly irreparable state of affairs, culminating in an outcome that may favour one partner more than another. It is therefore worth having a think about these occurrences before the business even comes into being.

From a legal perspective, much will hinge on the formal stature of the partnership, as this could have a significant bearing on whom, if anyone, stands to lose most from the fallout. Under a traditional General Partnership agreement, each partner is equally responsible for the debts of the partnership. What this often means in practice is that the misconduct or negligence of one partner falls on the heads of everyone involved in the partnership. The agreement is therefore governed by the principal of ‘unlimited liability’. On the other hand, a Limited Liability Partnership (LLP), as the name suggests, operates in a slightly different manner. Under this arrangement, each partner is held solely to account should their own conduct be judged as the principal cause of any damage to the company’s name or financial position. 

Needless to say, the latter option is becoming increasingly popular as far as business partnerships in the UK are concerned. “Lots of people now are saying ‘let’s run ourselves as a Limited Liability Partnership because then we can have the best of both worlds’,” comments Clive Rich, owner and CEO of online law firm LawBite. “They give you the benefits of partnership without that potential risk that you could be unlimitedly responsible for the actions of your fellow partners.”

Putting aside circumstances when the conduct of one partner brings a firm into disrepute or significant debt, due consideration must also be given to disagreements that conclude with a partner saying they ‘want out’ or a number of partners exerting pressure on another to step down. Rich explains that the legislation governing these situations is both dated and complex. As a result, it can open the door for outcomes that probably wouldn’t emerge if a written agreement between parties is signed at the time of a company’s foundation, or at least before the danger signs start to show. Such unwanted scenarios – as covered in  the Partnership Act 1890 – could include any partner having an undefined right to dissolve the company, as well as no restrictive covenants being in place, thus meaning an exiting partner would be free to set up in competition.

It goes without saying, then, that relying solely on the law in these matters is a hazardous path indeed. “You don’t really want to be leaving the resolution of disputes to those kinds of legislation,” adds Rich. “It is much better for everybody if you could have thought through it yourself and said ‘in the unlikely event that this all goes wrong, here is how we should sort it out’.”

Whilst a decent lawyer will be able to pinpoint the sorts of things that should be discussed here, without the agreement of all parties concerned, the spectre of litigation will still loom large. 

Rich nevertheless says that company assets are usually one of the biggest points of contention and a key area that should be covered in the paperwork. “If a partnership of any kind goes wrong, the first debate that occurs is ‘what happens to the things that create value in the company?’” he explains. “‘Who owns those and in what measure, and how can I protect my share of it?’”

Indeed, the precise amount of money that has been ploughed into the company by respective partners should dictate these conversations, as sensitive a subject as that may be. This becomes more pertinent when one considers that the Partnership Act also assumes everyone to be entitled to an equal share of profits, unless alternative arrangements are put in place. “This may not have been intended at all, for example by a senior partner who put in most of the money,” adds Rich.

Clearly then, it pays to put a marker down early to avoid a messy and potentially catastrophic break-up. “If people can’t work out these areas amicably, you get into a destructive cycle where people are seeking to punish the other party even at the expense of the enterprise itself,” Rich explains. “That is when you get people trying to wind up the company, call a liquidator or dissolve the partnership against the wishes of the person that they have now fallen out with.”

All said and done, a business partnership can be treated a bit like a marriage, according to Rich. A pre-written document outlining how things will pan out at the end almost serves as something akin to a prenuptial agreement. “I understand why people are reluctant to do that because it seems a bit vulgar before you get married to be thinking about how you are going to get divorced,” he says. “However, when you are in business with somebody, it is a more rational exercise even if everyone is probably swept away with a wave of enthusiasm at the beginning.”

Of course, an acrimonious conclusion is the last thing anybody wants, but it’s always worth bracing yourself just in case.  

About the Author

Adam Pescod

Adam Pescod

EB's former editor, Pescod was tasked with ensuring these hallowed pages are rich with excellent, engaging and error-free stories, all written with the entrepreneur in mind. Pescod previously plied his trade penning pieces about pubs and pints. He is also a sucker for alliteration. 

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