Bringing a new business partner into an established business can create opportunities for growth, investment and additional expertise. However, it also changes the legal and commercial relationship between the people who own and operate the business.
Whether the incoming owner contributes capital, specialist knowledge, industry contacts, or management experience, the arrangement should be properly documented before the relationship begins. A clear business partner legal agreement UK arrangement can help establish ownership, responsibilities, decision-making powers and procedures for dealing with disagreements or future changes.
The legal position also depends on the business structure. An ordinary partnership, limited liability partnership (LLP) and private limited company have different legal characteristics and obligations.
Here are nine legal issues to consider before bringing on a new business partner.
1. Decide on the Appropriate Business Structure
The first consideration is determining how the incoming owner will legally participate in the business.
In an ordinary business partnership UK arrangement, the partners generally share responsibility for the business, including its losses and liabilities. GOV.UK explains that partners personally share responsibility for the business, while profits are shared between them and each partner pays tax on their share.
An LLP has a different legal structure. It is a separate legal entity and can have two or more members. Members generally have limited liability for the LLP’s debts, subject to the circumstances, and an LLP agreement governs matters such as profit sharing, decision-making, and members joining or leaving.
If the business operates as a limited company, the incoming individual may instead become a shareholder, director or both. Their business partner rights will therefore arise from the company’s constitutional documents, shareholders’ agreement and applicable company law.
Choosing the appropriate structure at the outset can help avoid uncertainty about business ownership UK arrangements, and personal liability.
2. Clearly Define Ownership and Investment
When someone joins an existing business, it is essential to establish exactly what they will own and what they are contributing.
This may involve determining:
- The percentage of the business being acquired
- The amount of capital being contributed
- Whether the contribution is cash, assets, expertise, or another form of consideration
- Whether the incoming owner receives shares or a partnership interest
- How future investment will be handled
- Whether ownership can change over time
Ownership should not simply be assumed from a person’s involvement in the business. The legal and commercial position should be documented clearly.
For companies, this may involve issuing or transferring shares. For partnerships and LLPs, the relevant partnership or LLP agreement should establish the interests of the parties.
A properly structured co-owner agreement UK arrangement can help distinguish ownership from management responsibilities and reduce the potential for disagreement later.
3. Put the Arrangement Into a Written Partnership or Shareholders’ Agreement
A handshake may establish a business relationship, but it is rarely sufficient to govern what happens when circumstances change.
A partnership agreement UK document can set out how a partnership will operate and what happens when difficult situations arise. For an LLP, GOV.UK specifically identifies matters such as profit sharing, decision-making, members’ responsibilities and how members can join or leave as matters that can be addressed in an LLP agreement.
For a limited company, a shareholders’ agreement can address similar commercial issues between the owners.
Depending on the structure, a business partner legal agreement UK arrangement may address:
- Ownership percentages
- Capital contributions
- Profit and loss arrangements
- Decision-making
- Partner responsibilities
- Confidentiality
- Intellectual property
- Restrictions on competing activities
- Transfers of ownership
- Admission of future owners
- Exit arrangements
- Dispute resolution
- Death or incapacity
- Dissolution or winding up
The agreement should reflect the business’s legal structure and circumstances rather than relying on a generic template.
4. Define Roles, Responsibilities and Decision-Making Powers
Two people can own a business together without having identical day-to-day responsibilities. Problems can arise when those responsibilities aren’t clearly defined.
The agreement should establish who is responsible for areas such as:
- Financial management
- Business development
- Client relationships
- Staffing
- Operations
- Supplier relationships
- Regulatory compliance
- Strategic decisions
It should also specify which decisions an individual can make independently and which require the other owners’ consent.
Major decisions might include taking on substantial borrowing, selling significant assets, entering into major contracts, changing the company’s structure or bringing another owner into the business.
Clear decision-making procedures can help protect business partner rights while also making each person’s partner responsibilities understood from the outset.
The Law Society highlights the importance of properly addressing responsibilities, profits, dispute scenarios, and the protection of owners’ interests when people go into business together.
5. Agree How Profits, Losses and Further Funding Will Be Managed
All parties should agree on financial expectations before the new partner joins.
The owners should consider:
- How profits will be divided
- How losses will be allocated
- Whether owners receive salaries, drawings or other payments
- How much profit will be reinvested
- Whether additional capital may be required
- What happens if one owner cannot contribute further funds
- Whether additional investment changes ownership percentages
The proportion of ownership and how profits are distributed may not always match, depending on the structure and the agreement between the parties.
In an ordinary partnership, partners generally share responsibility for business losses and profits under the partnership arrangement.
Putting the financial arrangements in writing gives each owner a clear understanding of their economic position and can reduce later disputes over money.
6. Protect Confidential Information and Intellectual Property
An incoming owner may gain access to commercially sensitive information that was previously restricted to the existing owners.
This could include:
- Customer and supplier information
- Pricing structures
- Financial records
- Business strategies
- Marketing plans
- Trade secrets
- Software
- Databases
- Copyright
- Trade marks
- Other intellectual property
The owners should establish who owns the business’s intellectual property and whether any existing owner originally created or personally acquired any assets.
The agreement should also address confidentiality and, where legally appropriate, restrictions relating to competing activities or the solicitation of clients, suppliers or employees.
This is particularly important where the business’s value depends heavily on intellectual property, confidential information or established commercial relationships.
A solicitor experienced in commercial law UK matters can help identify whether the protections are appropriate for the specific business and structure.
7. Agree What Happens If a Partner Wants to Leave
It is easy to focus on the start of a business relationship and overlook what happens when one owner wants to leave.
A well-drafted agreement should consider possible exit scenarios, including:
- Voluntary departure
- Retirement
- Long-term illness or incapacity
- Death
- Insolvency
- Serious misconduct
- Material breach of the agreement
- Breakdown of the business relationship
The owners should consider whether the remaining partners or shareholders have the right to purchase the departing owner’s interest and how to calculate its value.
Other questions include:
- Is there a minimum notice period?
- How will the purchase price be paid?
- Is an independent valuation required?
- What happens to outstanding loans or capital accounts?
- What restrictions apply after departure?
The Law Society recommends that business owners consider issues such as what happens if partners fall out, whether someone can be forced out, how disputes can be mediated, and how ownership interests should be dealt with when an owner leaves.
Addressing these matters in advance is an important part of partnership dispute prevention.
8. Establish a Process for Resolving Disputes
Even where the owners have a strong working relationship, disagreements can arise.
Potential disputes may concern:
- Financial contributions
- Profit distributions
- Management decisions
- Business strategy
- Performance
- Alleged breaches of the agreement
- Conflicts of interest
- Bringing in another owner
- The value of a departing owner’s interest
A partnership or shareholders’ agreement can establish a procedure for dealing with disputes before they escalate.
Depending on the circumstances, this could involve internal discussions, negotiation, mediation, arbitration or court proceedings.
The agreement should make clear how a dispute is initiated, who must be involved and whether certain forms of alternative dispute resolution should be attempted before litigation.
An agreed process does not guarantee a dispute will never occur. It can, however, provide a framework for addressing disagreements and potentially reduce uncertainty and costs.
9. Carry Out Legal and Commercial Due Diligence
Due diligence should not be limited to buying an entire business. Existing owners should also consider carrying out appropriate checks before giving someone an ownership interest.
The existing owners may wish to understand the incoming partner’s:
- Existing business interests
- Potential conflicts of interest
- Directorships
- Financial position where relevant
- Professional background
- Regulatory obligations
- Existing contractual commitments
- Relevant litigation or disputes
At the same time, the incoming partner should conduct their own due diligence on the business.
They should understand its financial position, liabilities, contracts, asset ownership, intellectual property, regulatory obligations, and any existing or potential disputes.
This two-way process can help ensure that all parties understand what they are entering into.
The Law Society notes that businesses involving multiple owners may benefit from shareholder or partnership arrangements designed to protect each person’s financial and non-financial investment and establish how potential problems will be handled.
What About Employees When Ownership Changes?
When bringing in a new owner involves transferring a business or part of a business to another employer, employment law considerations may also arise.
In particular, the Transfer of Undertakings (Protection of Employment) Regulations, commonly known as TUPE, can protect employees when a business or part of a business transfers to a new employer. Where TUPE applies, employment contracts and certain employment rights generally transfer to the new employer.
Whether TUPE applies depends on the transaction’s structure and circumstances. Employers may also have information and consultation obligations in relation to affected employees.
This is an important consideration where bringing in a new owner involves a broader restructuring, acquisition or transfer of the business rather than simply changing the ownership of shares.
Conclusion
Bringing a new business partner into an established business is a significant legal and commercial decision. Before the arrangement is finalised, the existing and incoming owners should clearly understand ownership, investment, responsibilities, decision-making powers, profit arrangements, and future exit rights.
A carefully drafted business partner legal agreement UK arrangement can provide a framework for the relationship and help address difficult situations before they become disputes.
Whether you are establishing a business partnership UK arrangement, bringing a shareholder into a private company, or restructuring ownership through an LLP, early business legal advice can help ensure the arrangement reflects the parties’ intentions and protects their respective interests.
AM International Solicitors advises businesses and individuals on complex commercial arrangements, contractual matters, business disputes and international legal issues. If you are considering bringing a new owner or partner into your business, professional advice can help you establish the appropriate legal framework before the new relationship begins.
