The day has come where you have been  asked if you would like to become a partner in the family business, but what does this really mean and what should you be thinking about before you agree to joining the partnership?

Being a partner in an unincorporated business, i.e. a partnership, comes with big responsibilities as you then become liable for what that partnership does. This covers:

  • Debts
  • Health and Safety
  • Environmental Considerations
  • Filing VAT Returns
  • Submitting Tax Returns

As well as sharing in the risks of the business, as a partner you would also share in the rewards if the business does well with a share of the profits at the end of the year.

You should consider drawing up a partnership agreement, or if there is an existing partnership agreement, updating this. This is something which your solicitor would be able to help you with and should cover issues like:

  • How income/profits are to be shared?
  • How capital is held?
  • How capital profits/losses are shared/borne?
  • What are to be included as partnership assets?
    - Is the farm/land to be treated as a partnership asset?
    - Are any assets to be put into property capital accounts?
  • What level of contribution is expected of each partner?
  • In the event of a voting deadlock, who gets the deciding vote?
  • The level of drawings each partner is to get
  • At the end of the day, what are the buy out terms to be?

As a partner, you would no longer take a salary/wage from the business, and instead you would get a share of the profits (or losses!), which would be declared on your personal tax return. These profits or losses would be added to/deducted from your capital account in the business and from this you can take drawings. Any personal tax due on these profits would also be deducted from your capital account if the partnership covers the tax bill.

We would strongly recommend seeking advice from your accountant and solicitor before becoming a partner in your family business to ensure you make an informed decision as to how this may affect you and your personal circumstances. For example, taking a share of profits instead of a salary/wage can sometimes make it more difficult to secure a mortgage/re-mortgage as your income becomes less reliable/more prone to fluctuations – but the flip side is you have the opportunity to build up capital in the business. If you have any queries on the implications of partnership, please get in touch with your usual Dodd & Co contact.

By Sam Bell (Chartered Accountant)

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