Starting a business can be an exciting but sometimes stressful time, bringing people together with different skills, experiences and expectations. The individuals involved in the new venture may also be making different contributions to the company, with differing amounts of responsibility and expertise.
When two or more people endeavour to run a business jointly, they can create a partnership. Under the 1890 Partnership Act, a partnership automatically comes into existence between people as soon as their activities satisfy a very straightforward legal test, namely that they: “carry on business in common with a view to profit”.
In the rush to get the new business launched as quickly as possible it’s easy to assume that all stakeholders will want the same thing. The reality, however, can often be very different, especially in the long term.
It is, therefore, important to take the time to sit all parties down as early as possible to seriously discuss the way the business will work, so they all know exactly where they stand from the start. A formal agreement should be drawn up to avoid unnecessary future disputes – these are referred to as shareholder or partnership agreements, depending on what kind of business you have.
A shareholder or partnership agreement is a legal, written agreement between either the shareholders or the partners of a business, covering several areas, and becoming a substantial constitutional document – a bible of sorts – for the organisation.
Some of the specifics the agreement covers will depend on the nature of the business. There are, however, some key areas that should be included in all partnership and shareholder agreements. These are:
• Ownership of the partnership or company assets
Will ownership of all assets be in the name of the business or the individual partners or shareholders.
• Structure of the business
It’s best to have thought this through at the very start, but things will change, and provisions should be included for this, particularly regarding any necessary changes following tax and legal advice.
• How decisions are made
This should include details on which partners or shareholders can bind the business to contracts? Which partners or shareholders can sign cheques? How often will the partners or shareholders have to meet to discuss plans or issues?
• Contributions and effort made by the partners or shareholders
How many hours will the partners or shareholders be required to work? Can they have other business interests?
• What happens if a partner or shareholder dies?
Will the shares of a deceased partner or shareholder be passed on to their next of kin or absorbed back into the business and the surviving partners? What sum should be provided for the share? How will the valuation be decided?
• Exit planning
Will the agreement include a right for the partners or shareholders to sell their stake at any point? Will the remaining partners or shareholders be required to buy-back the share? What will happen if the relationship between the partners or shareholders breaks down, or one party suffers a serious accident or illness and cannot continue to fulfil their responsibilities to the business?
From time to time disputes between partners or shareholders will happen. A shareholder or partnership agreement should set out details of how disputes should be resolved. Is one person given a casting vote or will a trusted advisor be required to give their opinion or make a decision on the matter?
Most of the time disputes will be resolved informally, but if the shareholders have a difference of opinion that can’t be resolved, the company may have to be wound up.
If the dispute cannot be resolved and the company is wound up, the agreement should also contain details of how to distribute the assets between the partners or shareholders.
In order to minimise the potential for conflict and reduce the risk of uncertainty in the future, here at Hutchinson Thomas, we believe that it’s vital for a business to come to an agreement on these fundamental issues as early as possible and get a formal, legally binding agreement drawn up by a qualified legal professional.
For a free initial discussion about drawing up a shareholder or partnership agreement, contact Darren Davies, Partner at Hutchinson Thomas on Darren.firstname.lastname@example.org or call 01639 640 150.