By Louise Misiewicz
Are you thinking about setting up a Partnership?
Have you thought about the legal requirements?
I was talking to an investor client at the start of this week. He was considering setting up a Partnership for his property business, but didn’t where to start and was confused about the legal requirements.
As leading property tax specialists, I and my team ensure that all of our clients get the best advice on any area of property investment – including setting up a Partnership for an expanding property business.
What do property investors need to consider?
I’ve prepared an outline of considerations for a property business looking to set up in Partnership, and thought it would be useful reading for investors considering this option for their property portfolio.
Think about if the purpose of the Partnership is to carry out a specific project, or to continue trading within an existing property business.
If you’re looking to set up a property business Partnership, think about if there are any circumstances in which the Partnership will automatically terminate, such as the loss or destruction of a particular asset, or the insolvency of any party involved.
Are there also any circumstances in which any party will be entitled to terminate the Partnership, for example, a material breach of the Partnership agreement by another party, or by notice of termination given after the expiry of a minimum fixed term?
Will death, bankruptcy, retirement or expulsion of a partner lead to dissolution, or will the Partnership continue despite such events?
When considering the capital requirements of a Partnership, I recommend that any property investor should speak to a solicitor assisting with the Partnership arrangement, and think about the following questions:
- How much capital will be required initially?
- In what proportions will the partners themselves provide capital?
- Will profits and losses be apportioned in the same proportions?
- Will interest be paid on capital/undrawn profits?
- Will the partners’ initial investment be in cash or by contribution of assets
When setting up a Partnership, the most common injection of capital comes from the assets based upon all the rental properties held in the personal names of the property investors. Seek advice on capital inputs.
Some things remain the same for a Partnership as for any established set up within a property business. For example, insurance policies for a Partnership will be the usual level for a property portfolio. The costs of all insurances required to run a property business will, as is the case outside a Partnership, be a tax allowable expense of your business operations.
All partners active in the Partnership will need to agree the time devoted to the business, and whether they will be engaged, actively or passively, in any other business interests.
This area raises questions such as:
- What will be the partners’ obligations of confidentiality?
- Will there be a restriction on the assignment of an interest in the Partnership?
- Who is responsible for specific tasks, especially legal requirements?
- How will any of the above be measured?
With these sort of considerations, I recommend speaking to a solicitor and confirming the legal position within a Partnership as well as the broader implications for all investors involved in the Partnership.
Questions should be confirmed on whether any individual can make decisions independently of others in the Partnership on the running of the Partnership business, and what controls will be in place.
It’s also worth thinking about how often meetings will be held, and if unanimous agreement will be needed on certain matters, such as bringing in a new partner into the business or altering the profit shares.
How will the Partnership deal with outgoing partners? Will this be voluntary at a certain age? Will partners be entitled to suspend another partner, in what circumstances, and using what procedure? Will a suspended partner continue to receive a profit share during a period of suspension?
Can a partner be expelled from the Partnership on grounds of bankruptcy, mental incapacity, or breach or Partnership agreement? Can partners expel another partner on the basis of a unanimous vote, even if there are no specific grounds for expulsion? Will the Partnership be dissolved, or continue, when a partner leaves? I would suggest that it continued unless it is the partner who legally owns all the assets.
Think about the following questions regarding an outgoing partner from a property Partnership:
- How and when will payments to the outgoing partner be calculated?
- Will accounts be prepared as at the date of leaving?
- Will the basis of the calculation be the same whether the outgoing partner is expelled or retires?
- How will repayment of capital be financed?
Will the Partnership be dissolved, or continue, when a partner leaves? I would suggest that it continued unless it is the partner who legally owns all the assets. if a Partnership is dissolved, it’s advisable to clarify with a solicitor the best solution given the reasons for dissolution, and if the business could be incorporated into a Limited Company instead.
There are a number of considerations when setting up a property business Partnership, and I hope that the questions above will ensure that any investor is fully armed with the key elements to remember.
I would also advise speaking to a solicitor at the earliest stages, as well as speaking to a property tax expert.
What are the benefits of Partnership for a property business?
The example above clearly highlights some of the benefits of setting up a property business Partnership.
Other articles I’ve written which will provide useful associated reading include:
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