The need for a 'pre-nup' for new businesses

The owners and partners in the majority of small and medium-sized businesses in the UK have no legal protection against a partnership bust-up, according to figures released by O2 and the Law Society.

In response, O2 and the Law Society have come together to provide access to free legal information and advice designed to protect SMEs in the event of a dispute.

The campaign, which includes a service offering free legal advice and a comprehensive information pack, also includes the basis of an 'SME-nup', an agreement for business partnerships.

Handshake

The launch of the campaign follows feedback from research among O2's small business customers and a survey of the Law Society's members, which found that over one-third of their SME client base did not have a current partnership agreement.

Goodwill at the start of the relationship is often considered enough, with over two-thirds of the smaller SMEs questioned revealing that their partnership is based on a handshake and trust rather than any kind of written contract. SMEs whose partners are family members were revealed as the least likely to have signed a legally binding partnership agreement.

Feedback from solicitors revealed that the absence of the correct legal protection can cost businesses thousands of pounds in the event of a dispute, while preparing the adequate paperwork can cost as little as £100.

The findings come at a time when new business start-ups are at record levels in the UK, despite a slowing economy. Last year saw the number of new businesses increase by 3 per cent, the highest level in 20 years, with growth expected to continue throughout 2008.

Andrew Holroyd, President of the Law Society, said: "People don't go into business together expecting to fall out, so it's all too easy for them to fail to take the correct legal precautions or seek sound advice before launch. Such a large number of SMEs operating without any kind of protection is alarming, and some kind of partnership agreement is crucial. While it isn't possible to create one document to suit every business, with O2 we are making it as easy and affordable as possible to get protection."

SME-nup

Available online, the SME-nup covers the common areas of contention, including the agreeing of business financing, identifying the contribution of assets between partners, and managing the transfer of partnership interests. Businesses downloading the checklist will also be entitled to a free half-hour consultation with a local business solicitor, who will provide legal guidance and formulate the SME-nup into a legally binding partnership agreement.

While legal documentation is bespoke to each SME, feedback from solicitors has identified the following areas as forming the basis for a partnership agreement:

• Business of the partnership
  
• Financing the business
  
• Contribution of assets
  
• Transfer of partnership interests
  
• Rights to take a part in management
  
• Rights of 'sleeping' partners
  
• Administration
  
• Profit distribution

Simon Derbyshire, head of small business marketing at O2, said: "It's great to see that new SMEs are continuing to increase in number in spite of the current business climate. However, feedback from our customers reveals that they often overlook the legal procedures involved with setting up a business because they're too busy getting the business started. This new service will make it easy for any new or existing SME's to quickly establish a solid legal foundation for their business."

The SME-nup, which can form the basis of a business partnership agreement, can be downloaded from here - pdf.