Business Partners

Starting a business with other people is exciting. You bring complementary skills, share the workload, and can move faster than going solo. But shared ownership also introduces complexity that solo founders never face - competing visions, unequal contributions, disagreements about money, and the ever-present question of what happens when someone wants out.

The single most important thing you can do before launching with a partner or co-founder is to put your arrangement in writing. Not because you expect things to go wrong, but because clear agreements make good partnerships better. When everyone knows the rules - how profits are split, who makes which decisions, and how exits work - the business runs more smoothly and the relationship stays healthier.

The type of agreement you need depends on your business structure. Traditional partnerships need a partnership agreement. Limited liability partnerships (LLPs) need an LLP agreement. Companies need a shareholders agreement. This chapter walks through each option and helps you work out which you need.

If you are running a business as a general partnership - two or more people carrying on business together with a view to profit - a partnership agreement is the document that governs your relationship. It sets out each partner's rights and obligations, how money flows, and what happens when things change.

Why You Need One

English and Welsh law does not require a written partnership agreement. But without one, the default rules under the Partnership Act 1890 apply - and those defaults are rarely what partners actually intend. Under the Act, all partners share profits and losses equally, regardless of who contributes more capital, time, or expertise. Every partner has equal say in management decisions, and no partner can be expelled by majority vote unless the agreement expressly provides for it. These Victorian-era defaults were not designed for modern businesses.

What to Include

A well-drafted partnership agreement should cover the following areas at a minimum:

• Profit and loss sharing- the ratio for splitting income and losses, which does not have to be equal. It should reflect each partner's capital contribution, time commitment, and the value of their expertise.
• Capital contributions - how much each partner puts in upfront, whether further contributions can be required, and how capital is treated on exit.
• Decision-making - which decisions require unanimous consent (admitting new partners, taking on debt, selling the business) and which can be made by majority or individually.
• Roles and responsibilities - who handles what. Even informal divisions of labour should be documented so expectations are clear.
• Drawings and remuneration - how much each partner can draw from the business, and whether any partner receives a salary for active management.
• Exit mechanisms- how a partner can leave, what notice period applies, how the departing partner's interest is valued, and how it gets paid out.
• Dispute resolution - a mandatory process (usually mediation, then arbitration) before court proceedings.
• Restrictive covenants - whether a departing partner is restricted from competing with the business for a period after exit.

LLPs as an Alternative

The Limited Liability Partnerships Act 2000introduced a hybrid structure that combines the flexibility of a partnership with the limited liability of a company. An LLP is a separate legal entity - members are not personally liable for the LLP's debts beyond their capital contribution (though members can be liable for their own negligence). LLPs must be registered at Companies House, file annual accounts, and submit a confirmation statement.

LLPs are popular with professional services firms (law, accounting, consulting) because they offer liability protection without the full governance requirements of a limited company. The members' agreement for an LLP serves the same function as a partnership agreement for a general partnership - and is just as essential.

If your business operates as a limited company (Ltd), you need a shareholders agreement. While a company's articles of association set out basic governance rules under the Companies Act 2006, a shareholders agreement goes further - it is a private contract between shareholders that governs their relationship, protects minority interests, and addresses scenarios the articles do not cover.

Key Provisions

• Pre-emption rights - if a shareholder wants to sell their shares, existing shareholders get the first opportunity to buy them. This prevents unwanted third parties from joining the cap table. Note that pre-emption rights on share transfers are separate from statutory pre-emption rights on new share issues under the Companies Act 2006.
• Drag-along rights - if shareholders holding a specified majority agree to sell the company, they can compel minority shareholders to sell on the same terms. This protects buyers who want 100% ownership.
• Tag-along rights- if a majority shareholder sells their stake, minority shareholders can "tag along" and sell their shares on the same terms. This protects minorities from being stranded in a company they did not choose to partner with.
• Deadlock resolution - in a 50/50 company, or any structure where disagreement can paralyse decision-making, the agreement should include a mechanism to break deadlocks. Options include casting votes, independent chair appointments, or buy/sell (shotgun) clauses.
• Reserved matters - decisions that require unanimous or supermajority shareholder approval, such as issuing new shares, taking on significant debt, or altering the articles.
• Dividend policy - how and when profits are distributed, and minimum distribution requirements.

The agreement you need depends on how your business is structured. Use the decision tree below to identify the right starting point.

If you are a company with co-founders, you will likely need both a shareholders agreement and a co-founder agreement (or a single document that covers both). If you are currently operating as a partnership but planning to incorporate later, put a partnership agreement in place now and convert to a shareholders agreement when you transition to a Ltd.

A co-founder agreement is a specialised form of shareholders agreement designed for the early-stage reality of startups - where the business has more potential than revenue, founders are contributing sweat equity rather than cash, and roles are still evolving. It typically covers everything in a shareholders agreement plus provisions specific to the founding team.

Vesting Schedules

Vesting is how founders earn their equity over time rather than receiving it all upfront. A standard vesting schedule runs over three to four years with a 12-month cliff. If a co-founder leaves before the cliff, they forfeit all their equity. After the cliff, shares vest monthly or quarterly. Vesting protects the remaining founders from a co-founder who leaves early but retains a large equity stake in a business they are no longer contributing to.

In the UK, founders should be aware that share vesting can have income tax and Capital Gains Tax implications. Obtaining HMRC approval under the Enterprise Management Incentives (EMI) scheme or using growth shares can be tax-efficient approaches - speak with a tax adviser before structuring founder equity.

IP Assignment

Any intellectual property that founders create for the business - code, designs, brand assets, inventions - should be formally assigned to the company. Without a written IP assignment, founders may retain personal ownership of work they created before or outside the company's formal engagement. This is one of the first things investors check during due diligence. For more on IP protection, see our intellectual property chapter.

Roles and Responsibilities

Early-stage startups are fluid, but documenting who is responsible for what - even at a high level - prevents overlap, gaps, and resentment. The agreement should cover each founder's expected time commitment, functional responsibilities (product, sales, operations), and what constitutes a material breach of their obligations.

Disagreements between business partners are not a matter of if but when. The question is whether you resolve them quickly and constructively or let them escalate into expensive, relationship-ending legal battles. A good agreement builds in a structured escalation path that keeps disputes proportionate.

Mediation

The first step should be mediation - a confidential process where an independent mediator helps the parties find a resolution. Mediation is significantly cheaper and faster than court proceedings, and it preserves the working relationship better than adversarial processes. UK courts actively encourage mediation and may impose costs penalties on parties that unreasonably refuse to mediate. Most commercial disputes that go to mediation settle.

Arbitration

If mediation fails, the agreement should provide for arbitration - a binding determination by an independent arbitrator under the Arbitration Act 1996. Arbitration is private (unlike court proceedings), generally faster than litigation, and the award is final and enforceable. It is the preferred fallback for commercial disputes in most partnership and shareholders agreements.

Buy-Sell Mechanisms

For deadlocks that cannot be resolved through mediation or arbitration, the agreement may include a buy-sell (or "shotgun") clause. One partner names a price at which they are willing to buy the other out. The other partner then chooses whether to buy or sell at that price. This mechanism forces fair pricing because the person setting the price does not know which side of the deal they will end up on.

Partner departures are inevitable over the life of a business. People move on, burn out, disagree, or simply want to pursue something different. The exit provisions in your agreement determine whether a departure is a manageable transition or a crisis.

Exit Provisions

Your agreement should specify how a partner or shareholder can leave (voluntary resignation or share transfer), the notice period required, and whether the remaining members have a right to buy the departing person's interest before it can be offered to outsiders. For LLPs, the Limited Liability Partnerships Act 2000sets out default provisions for member retirement, but these should be supplemented by the members' agreement.

Valuation Methods

The most contentious aspect of any exit is the price. Your agreement should specify a valuation methodology - or at least a process for determining one. Common approaches include:

• Book value - the net asset value on the balance sheet. Simple but often understates the true value of a going concern.
• Market value - what a willing buyer would pay. More accurate but requires an independent valuation.
• Formula-based - a multiple of revenue or earnings agreed upfront. Quick and predictable, but may not reflect market conditions at the time of exit.
• Independent valuer - the parties appoint a third party (usually a chartered accountant) to determine fair market value. This is the most common approach for disputed exits.

Restrictive Covenants

A restrictive covenant prevents a departing partner from competing with the business or soliciting its clients for a specified period and within a defined area. In England and Wales, restrictive covenants are enforceable only if they go no further than reasonably necessary to protect the business's legitimate interests. Courts will strike down covenants that are too broad in scope, duration, or geographic reach. Typical restrictions run for 6 to 12 months within a defined market or region.