Shareholders’ Agreements vs Partnership Agreements - Which do you need?

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Shareholders’ Agreements vs Partnership Agreements - Which do you need?

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Starting a business with someone else is exciting. But it’s easy to forget about the paperwork that protects everyone. Whether you’re launching a UK startup, small business, or joint venture, one of the first legal questions you’ll face is:

Do we need a Shareholders’ Agreement or a Partnership Agreement?

Even though these documents have similar goals – setting out how business will run - they apply to very different business structures. Choosing the wrong one (or having no agreement at all) can cause serious disputes and financial problems down the line.

What’s the difference?

It will all depend on what kind of structure you’ve chosen for your business:

• If the setup is a limited company, you’ll need a Shareholders’ Agreement.

• If you’ve chosen partnership (without forming a company) you’ll need a Partnership Agreement.

These business structures differ not just on paper – they bring different type of responsibilities – who’s overseeing if something goes wrong, how taxes work and how decisions are made. That’s why it’s critical to have the right legal agreement from the start.

What do these agreements cover?

Both types of agreements aim to make sure everyone involved knows where they stand. They typically cover:

• Ownership and profit-sharing arrangements

• Roles and responsibilities of each party

• Decision-making powers and voting rights

• Exit strategies (e.g., selling shares or leaving the partnership)

• Dispute resolution mechanisms

• Restrictions on competing with the business after leaving

Without a written legal agreement, you’re relying on default UK legal rules – and these rarely reflect what business partners want or expect.

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Why Are They So Important?

Even the best business relationships can face challenges. Having a written agreement in place reduces the risk of disputes, protects everyone involved and makes your business more stable – more attractive to investors or lenders.

Common issues we see when no agreement is in place include:

• How profits should be divided or re-invested?

• One partner wanting to sell or exit while the other disagrees.

• A founder leaving and taking key clients or business information with them.

• Confusion over who gets to make certain decisions.

A well-drafted, strong agreement gives certainty, protects everyone involved, and ensures the business can continue to operate even if relationships change.

Quick guide: Which one do I need?

Business Type Agreement Needed

Limited company -> Shareholders’ Agreement

Traditional partnership -> Partnership Agreement

Still deciding on your business structure?

If you’re still exploring whether to set up a limited company or a partnership, now is the ideal time to seek legal advice. Your decision will affect:

• Personal liability - How much risk you personally take on?

• Tax treatment - How your profits are taxed?

• Funding opportunities - Ability to attract investment.

• Exit strategy - How easy it is to sell or transfer your business?

Final thought

Setting up a business with others can be one of the most rewarding decisions you ever make – as long as you’ve got the right legal foundations in place.

Whether you need a Shareholders’ Agreement or a Partnership Agreement, it’s worth investing in a properly written agreement that reflects your business goals, protects your interests, and reduces future risk.