When is the right time to find a business partner? 

Going it alone will certainly give you full control of your business, but two heads are often better than one, provided you team up with the right person.

When Natasha Penny started her accounts and bookkeeping service Busy Books six years ago, teaming up with someone else wasn’t an option: “I was very head strong in what I wanted to achieve and how I wanted to run my business.”

Flying solo

Penny, who incorporated her practice and now employs several staff, admits there are both pros and cons to being the only one in charge:

“There’s no one else to answer to, and everyone knows where they stand with just one boss. Customers also know who to turn to at the top for queries and customer service issues. On the other hand, you are always the one ultimately responsible if and when things go wrong.”

There is no one to share the load with, either. “It’s difficult at times to take a holiday or be sick, although it gets easier once a team and a practice manager are in place,” Penny says.

Like Penny, the vast majority of practitioners start out as ‘solo’ practitioners (sole practitioners with no staff), and then perhaps become ‘sole’ practitioners (sole practitioners with staff). And just like Penny, many choose a limited company structure for their business, becoming its sole director.

Teaming up

As your business grows, partnering up with another accountant or bookkeeper may be the next step up. Rob Ellis runs Welch & Ellis Accountants with his fellow director and shareholder, Ken Welch.

Ellis says: “Financial clout is perhaps one of the most tangible upsides of joining forces, with the potential for economies of scale, greater borrowing capacity and the tax savings to be realised from income splitting. Somewhat less tangible, yet equally as important, is the fact two heads are often better than one.” 

While Ellis and Welch incorporated their practice, the general partnership model (under the Partnership Act 1890) is still a popular choice among smaller accountants, perhaps due to the perceived ease of admin.

“The principle advantage of a general partnership is that all accounts and information relating to the partnership is private and does not need to be filed or disclosed to any public registry,” says Zulon Begum, partner at partnership law advisory firm CM Murray.

All you need to do is choose a name, choose a “nominated partner” and register the partnership with HM Revenue and Customs.

Choose the wrong partner, and you might find yourself kissing your business goodbye

When partnerships go wrong

But general partnerships can potentially cause big problems.

If there’s no written partnership agreement, the default provisions of the Partnership Act 1890 apply. So, partners are entitled to an equal share of the profits, no matter how much time or effort they have put into the running of the business. They cannot be expelled by other partners, either. And if a partner decides to leave (or if they die), the partnership must be dissolved and assets must be distributed equally, often at great financial and emotional expense.

Three years ago, friends Andy Steed* and Tony West* left their respective employers to start their own bookkeeping business.

“Two years in and Tony stopped pulling his weight, we argued a lot and soon working together became impossible so we decided to part company,” says Steed. “The ‘divorce’ was long and messy because there was no formal partnership agreement in place.”

Protect your position

“Partnership disputes can turn into a major distraction for the business, but it’s possible to minimise their likelihood and effect if you put in place a properly drafted partnership agreement,” says Begum. “This should set out in detail the rights and obligations of the partners (including rights on retirement / exit) and include a robust arbitration clause to be activated in the event of a dispute. Also, you should always seek legal advice when entering into a partnership agreement.”

Another issue is that a general partnership is not a separate legal entity.

Begum says: “The partners must enter into contracts in their own names and they have joint and several liability for all the debts and liabilities of the partnership.” Their personal assets are at risk and the liability is unlimited.

From the risk management point of view, a corporate structure such as a limited company or a limited liability partnership (LLP) generally works better because, if anything goes wrong, the damage is typically contained in the corporate entity.

Going limited can also be more tax efficient, ensures continuity and helps avoid potential disputes between ‘partners’.

‘We decided on a limited company primarily for tax reasons and the ability for more tax planning,” Ellis says. He adds: “The shareholders’ agreement details what would happen on sale of the business, or if the other one wanted to sell out, and salaries and dividend policy are pre-agreed, too.”

Choose the right partner

Natasha Penny isn’t sure she could team up with someone else having run the business alone for so long: “To me, it’s my baby.”

However, she adds: “That said, I can recognise that others can bring new, fresh qualities to the business. So if I were to do this, it would have to be someone I could work very closely with, and a constant and strong communicator. Like with employing, I’d choose someone with my gut and heart who would feel right and who would have similar values, ethos and vision for the business.”

Ellis agrees the decision is essentially an issue of recruitment. “Find the right partner, someone committed, reliable and who compliments what you bring to the table and the benefits are myriad. Choose the wrong partner, and you might find yourself kissing your business goodbye.”

(*names changed)

Iwona Tokc-Wilde is a business journalist.