Overview
Creative businesses are mostly small micro businesses, existing of sole traders or partnerships.

Partnerships can be a great way to share the workload or to combine skills and resources but - because they are often formed without an official contract - some caution is advisable too.

This factsheet explains what partnerships are, their advantages and disadvantages, the legal issues and the partnership agreement.

What is a partnership?
A partnership is a business where two or more people own a company, work together and share the profits or losses on an agreed basis (mostly in equal portions).

There are no legal requirements to set up a partnership, but you should consider a formal written contract. Business partnerships are very much like long-term relationships, and over the years of working together situations and attitudes can change, and bitter legal fights can ensue if nothing has been put in writing at the start.

A partnership can employ other people on a part-time, full-time or freelance basis. However the partnership element is limited to the owners of the business.

Creative partnerships are often started as a group of friends or colleagues who regularly work together. Additionally, there are also a lot of ‘husband and wife’ teams in the creative sector.

If you want to stay friends after your business split, it will be incredibly important to have your legal side covered. A good example are fashion designers Domenico Dolce and Stefano Gabbana of Dolce and Gabbana who recently split up romantically after 19 years, but who are continuing the management of their successful company.

Limited Liability Partnerships (LLPs)
Limited Liability Partnerships (LLPs) were established in 2000 as a new legal business form. They share many of the features of normal partnerships, but provide more organisational flexibility than normal partnerships. They also share the benefits of less liability with the Limited company. They are especially attractive to professional partnerships such as graphic designers, lawyers and accountants.

An LLP offers reduced personal responsibility for business debts. Unlike a normal partnership, the LLP itself is responsible for any debts that it runs up, not the individual partners.

For tax purposes LLPs are treated as a business run by partners rather than as a Limited company. Partners in an LLP are liable to pay the flat rate Class 2 National Insurance contributions (NICs) in the same way as self-employed people, and income tax and Class 4 NICs on their share of the partnership profits. The LLP itself will not be liable to corporation tax.

If you want to form a LLP you must register under the Limited Liability Partnership Act 2000 at Companies House.

Advantages and disadvantages of being in a partnership
The following are often seen as being positive attributes of being in a partnership:

• Two people working together have complimentary skills, which can be very cost-effective as people specialise and become more efficient in certain aspects of their creative business. One partner might be good at selling work and presenting to clients, while another is better at bookkeeping
• Two people know more than one. You have access to a wider pool of knowledge, skills and contacts
• You can be at two places at the same time
• Partnerships provide moral support and will allow for more creative brainstorms
• You can share resources such as money and equipment
• You need to be more organised than when you run your business solo, which often means that partnerships have better administration and financial systems in place than sole traders

On the negative side:

• A partnership is for the long term, and expectations and situations can change, which can lead to dramatic split ups. You might spend more time with your business partner than with anybody else, so losing that very intimate and personal business relationship can lead to major problems when splitting up
• You have to consult your partner and negotiate more as you cannot take decisions by yourself. So you need to be more flexible
• You both are responsible for the business debts and errors of others. So if the business fails and incurs debts, and your partner doesn’t pay his or her share, you will still be required to pay. This is even the case if debts were incurred by your partner’s dishonesty or mismanagement without your knowledge
• You have to share your profits and decide on how you value each other’s time and skills. What is more valuable to the company - a fantastic creative idea generator or somebody who can sell this idea to a customer? What happens if one person puts in 60 hours a week and the other one turns up late very regularly? What happens if one partner can put in less time due to personal circumstances, such as caring responsibilities or illness?

Legal issues

Legal advice: It is important to get advice from a solicitor, who can help you to draw a formal partnership agreement called a ‘deed of partnership’. It will cover aspects such as the business assets, profit shares, liabilities and responsibilities. It is important to get these sorted at the beginning of your business relationship to avoid any major emotional and financial problems later on. Especially if the people you work with are your friends you need to draft an agreement that specifies the expectations of the partnership and the above mentioned aspects to avoid potential problems.

Business form: Partnerships have sole trader status - the most informal business form - as they are unincorporated, unlike incorporated limited companies.

Tax: Although only one partner needs to return the partnership return, both partners are equally liable to paying income tax and any penalties occurred.

Trading under a different name: If the partnership is trading under a name other than that of the owner(s) then you must display the name and address of the owner(s), and an address for each at which legal documents can be served.

The partnership agreement
As discussed above you should get legal advice to draft your Deed of Partnership. This should cover the following points:

• The purpose and objectives of the partnership
• Capital - the amount of capital put in by each partner, which will include both money and equipment and other capital goods. It is good practice to have an up-to-date list of who owns which piece of equipment and who has contributed capital to the company. In case of splitting up with your partner each company asset will need to be revalued, and individual partners will need to split the assets or pay the other partner out
• The role and responsibilities of each partner. It is good practice to draft a job description for each partner
• The apportionment of profits and losses. Is this equal (50/50) and if not how is this split and why?
• The exit strategy. What are the arrangements in case of dissolving the company, including the retirement, death or long-term illness of a partner
• Ownership of the trading name. If you use another brand name who owns this, and would it be possible to use this name outside or after the partnership has been dissolved?
• Ownership of intellectual property, such as copyright. Is there a joint copyright or does one partner own ‘more’ of the copyright than others? In particular, when royalties are being paid due to patents this is an extremely important topic as it has got financial implications
• Exclusivity. Is a partner allowed to work on other individual projects outside of the partnership, which will not contribute to the income of the partnership?
• Management of the finances, bank account, signing of cheques and orders
• Hours of work and holidays allocated
• Arrangement for arbitration in the event of disagreement

Further information

HM Revenue & Customs (formerly known as the Inland Revenue and Customs)
Creative Choices

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