Relationships Between Business Owners - Shareholder and Partnership Agreements

Posted by Luke Mitchell on 20 April 2016
Relationships Between Business Owners - Shareholder and Partnership Agreements

One of the most fundamental – and costly – errors that co-owners of a new business can make is failing to record, in writing, their agreement as to how their business relationship is to operate.

The importance of a formal shareholders agreement (in the case of a company) or partnership agreement (in the case of two or more individuals) is often overlooked in the optimism and excitement that comes with a new venture. 

A formal agreement between the co-owners of a business can (and should) set out how some of the issues that are part and parcel of running a business are to be handled (and if need be resolved), including:

  • How the business is to be funded;

  • How profits are to be distributed;

  • How major decisions as to the operations and ownership of the business will be made;

  • How the board of directors (or partnership committee in the case of a partnership) is to be constituted;

  • The appointment of key staff to the business;

  • How disputes that arise between the co-owners of the business are to be resolved.

  • The process that is to be followed in the event of additional co-owners being introduced to the business;

  • The process that is to be followed if one or more of the co-owners wishes to exit the business.

Without a clear, formalised agreement the co-owners of a business venture are vulnerable to the whims of the other co-owners.

While no one goes into business expecting to end up in conflict with the other co-owners, disputes can and do arise. Where those disputes cannot be resolved early on by the parties themselves the absence of a formal agreement between the co-owners of the business can make it extremely difficult for the business to continue to operate. If the worst is to happen and legal proceedings are commenced it can be very difficult for a Court to ascertain what the parties intentions were in terms of how the running of the business and their relationship was to be governed.  This can result in serious, unintended consequences for all parties.

It is rarely too late to put in to place a formal ownership agreement, or to update an existing agreement.

A carefully crafted and well thought out ownership agreement can save significant time and costs through providing a clear mechanism through which key decisions are made and disputes resolved. We specialise in providing clarity and confidence to business operators in their legal relationships – contact us today to discuss the legal needs of your business.

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