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Q&A Partners in profits

I’ve run my own architectural practice for the past ten years operating it as a sole trader. Recently myself and two other sole trading architects I have known for many years have started to seriously table the idea of combining our businesses and creating a partnership. However I have very little knowledge of how partnerships operate in terms of the share of business and profit and what sort of tie ins there are in case any of us want to leave the partnership. Could you shed any light on this?

As soon as you start working together you will be deemed to have commenced a partnership, with a default set of rules under the Partnership Act 1890. These rules can give rise to difficulties when partners wish to go their separate ways. It is better to write down your own set of rules in a signed partnership agreement before you begin.

Profits will be shared equally unless you agree otherwise. Compare your turnover and, crucially, profitability, with what your prospective partners are achieving. Check their accounts. Ask questions about unusual items. Taking everything into account, is equal profit-sharing appropriate?

Consider what assets each partner is bringing to the partnership, for example goodwill, work-in-progress, debtors or premises. When deciding what credit to give each partner in relation to capital contribution, consider the real value of those assets. Do not accept balance sheet valuations.

You should ensure that you have a clear exit route if things do not work out. A standard professional partnership agreement will contain restrictions on partners who leave, in effect stripping them of any rights other than return of capital, and imposing restrictions on soliciting or acting for clients, even those introduced by the leaving partner. Agree at the outset precisely what will happen if one of the partners wishes to terminate the arrangement.

Partners are liable not only for their own defaults, but also for the defaults of their partners. Consider protecting your personal assets by trading through a limited liability partnership.

This Q&A was written for and first featured in the Financial Times

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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