Not sure what legal structure to adopt for your new startup business? Should it be a company, with shareholders and directors? Or should it be a partnership? And what’s the difference, anyway?
How Partnerships Work – Is This Structure Good For Your Startup?
A partnership is a more basic form of organisation than a company. It consists of two or more people pooling assets, engaging in a common business activity to generate income, paying their business debts, and sharing the profits. It is a relationship. The smart way to set it up is to have a partnership agreement, where the inputs and outputs of each partner are set out clearly. Having an agreement usually makes things run more smoothly, and prevents misunderstandings. It can map out how the partners will deal with all the important issues that they would be likely to encounter in their joint enterprise, including accepting new partners, leaving the partnership, splitting profits, leaving money in the business to fuel growth, and so on.
One important thing to appreciate is that both partnership and company structures work against a background of general legal principles. These principles vary from country to country, but a lot of countries have similar basic rules. One common rule is that each partner is 100% liable for the debts of the partnership, in relation to outside parties, even though they may have unequal shares of the business, internally. Therefore, if your partner disappears, even though you only own 10% of the business you will be liable to pay 100% of its debts. The solution the law offers you is to sue your partner, probably now your ex-partner, for his or her 90% contribution. This is what you might consider a downside of having a partnership.