Regardless of what size business you have, when there are multiple owners, shareholders or investors involved, business structure agreements are absolutely vital. These agreements are a proactive way to save you money, time and emotional stress if any disputes arise down the track.
In very simple terms, the types of business structures outside of sole proprietorship include:
- Company: a legal entity separate from its shareholders
- Partnership: an association of people or entities running a business together but not as a company.
- Trust: an entity that holds property or income for the benefit of others
What are the types of agreements?
For all of these types of structures, agreements are necessary to ensure certainty between parties. Agreements should be tailored to suit your individual business needs; however, some typical agreements include:
- Shareholder agreement
- Unit holder agreements
- Partnership agreement
- Joint venture agreement
What is the purpose of having an agreement?
A legal framework will define in legally enforceable terms:
- Everyone’s ownership/stake in the business
- A framework for everyone to follow which outlines the parameters of their rights/obligations
- What business decisions must be unanimous or made by the primary owner
- The required capital and liability contributions from all involved
- What income is retained for working capital
- Dispute resolution mechanisms
- Insurance arrangements and many, many more.
What are the benefits?
Legal agreements will benefit your business by:
- Creating greater certainty of individual responsibilities within your business that everyone follows
- Reducing the risk of litigation as everyone has clearly defined rights and obligations
- Allowing you to reduce time and money spent towards resolving disputes as there is a clear and secure legal framework ready to be followed
- Allowing all parties to focus on the business operations during difficult decision-making times.
Key Takeaways
- No matter how close your relationship is with the other parties involved in your business, you must ensure you get both legal and tax advice on the structure of the business and have a written agreement signed by all parties concerned.
- Avoid arguments over differing opinions about the operation of the business by having a properly prepared agreement in place that can resolve disputes efficiently and effectively.
- Understand that it’s healthy to negotiate an operating framework. If you already have a framework in place that requires updating or if you are looking to put one in place, seek professional advice to work through this.
At Donovan Oates Hannaford, it is important to us that our clients receive the best and most accurate information for their individual circumstances which is clearly understood. If you would like to discuss any questions you may have, please contact Donovan Oates Hannaford on 02 6583 0400 or info@dohlaw.com.au.
