Starting a business with your spouse or romantic partner can be really exciting!
You might be thinking to yourself: ‘who would be better to start a business with than my significant other?’
While it’s easy to get caught up in the fun of it all, it’s important to consider what legals you should have in place for the benefit of your business.
Unfortunately, not all relationships end in happily ever after. If you have the correct legals in place, you will be able to have confidence that your business will stay afloat and continue at optimal capacity, despite any relationship breakdowns.
Read on to find out exactly what legals you should have in place when starting a business with your significant other.
Choosing The Best Business Structure
The first thing to consider is business structure.
Choosing the correct business structure will help set solid foundations for your business.
The two most relevant business structures are a partnership structure and a company structure.
Let’s break them down.
What Is A Partnership Structure?
A partnership structure will allow you and your spouse/partner to run your business together as ‘partners’.
The pros of a partnership business structure include:
- It’s easy to set up
- It’s easy to dissolve if you wish to end your business
- It comes with little administrative costs
The cons include:
- The business is not a separate legal entity from you. This means that you can be personally liable for your actions or your partner’s actions
- It can be difficult to raise capital
- If one of you wants to leave the business, the partnership has to dissolve
Under a partnership structure, you should have a Partnership Agreement. This outlines the main concerns for your business, as well as the structure of you and your spouse/partner’s business relationship, how long you want the partnership to last for, and what happens when one of you wants to leave.
It is really important to have a Partnership Agreement in place to optimise the functioning of your business and partnership.
If you think a partnership business structure is best for you and your spouses/partner’s business, you should:
- Register a business name
- Register an Australian Business Name (ABN) and Tax File Number (TFN)
- Sign a Partnership Agreement
What Is A Company Structure?
A company structure will allow you and your spouse/partner to be shareholders — completely separate from your business, which will be its own legal entity.
As shareholders, you and your spouse/partner will be the legal owners and controllers of the company. This means that you can appoint ‘directors’ to make all of the decisions.
Yes, you can be both a shareholder and a director!
For more information on the distinction between a shareholder and a director, Australia’s corporate regulator, ASIC, explains it well here.
The most common type of company is a Proprietary Limited company. These are private companies and their liability is limited by the value of their shares. This means that shareholders, being you and your spouse/partner, generally cannot be sued for any company mistakes.
So, the pros of a company include:
- Limited liability
- Protection from potential risks, keeping assets, revenue and intellectual property safe
- Easy to raise capital
Some cons of a company structure include:
- It is not cheap. For example, ASIC takes an up front fee for company registration
Under a company structure, you and your spouse/partner should have a legally binding Shareholders Agreement in place. This will outline your business’ goals and facilitate a structured relationship between you and fellow shareholders. More on this in a bit.
If you are thinking that a company structure is best for you and your spouse/partner’s business, here is what you need to do:
- Register an ABN, Australian Company Number (ACN) and a TFN
- Sign a Shareholders Agreement between you and your spouse/partner
For more information on the differences between partnership and company structures, click here.
Determining what business structure best suits your business will help inform what legal agreements you need to put in place between you and your spouse/partner.
So, What Legal Agreements Should I Have In Place?
If a partnership business structure is most suitable to your business, you must have a Partnership Agreement in place between you and your spouse/partner.
A Partnership Agreement will outline all of your main concerns for your business as well as the structure of you and your partner/spouse’s business relationship.
A Partnership Agreement will generally address:
- The purpose of the partnership
- How important decisions will be made
- The course of action if your spouse/partner wants to leave
- The responsibilities of you and your spouse/partner as co founders
If a company structure suits your business best, a Shareholders Agreement between you and your spouse/partner is vital to the operating of your business.
A Shareholders Agreement will outline decision making processes and what will happen if your partner/spouse leaves the company.
A Shareholders Agreement may also address:
- The responsibilities of you and your spouse/partner as co-founders
- How shares are allocated
- What shares can be issued and sold
Founders Term Sheet
Alternatively, you may choose to have a Founders Term Sheet in place. Despite not being a legally binding contract, a Founders Term Sheet is an ‘agreement to agree’.
Typically, a Founders Term Sheet will:
- Address ownership of the business
- Outline how decisions are made
- Discuss what happens when a co-founder wants to leave the business
- Outline how disputes should be handled
Having appropriate agreements in place is vital for the sustainability of your business. If you’ve got a clear agreement from the get go, you and your partner can easily understand what roles you need to play and what will happen if something goes wrong.
How Do You Make Sure Your Roles Are Clear?
Ensuring that your roles are clear is extremely important to the success of your business and for preserving the relationship between you and your partner.
Having a conversation with your partner about your roles in the business is not enough. It is crucial that your roles and responsibilities are put into writing.
As discussed above, the type of written agreement you have in place will be dependent on what business structure you choose for your business. Whatever agreement this may be, it will help clearly define what roles both you and your spouse/partner play in your business.
When determining what roles you and your partner play, it is important to consider:
- Who will make decisions?
- What areas of the business will each of you be responsible for?
- How many hours will each person work on a regular basis?
- If something goes wrong with the business, what will happen?
- If something goes wrong with your relationship, what will happen?
Communicating the above to your partner, putting it into writing and ultimately agreeing on terms will help make sure your roles in your business are clear.
Do You Need To Pay Yourselves?
There is no requirement that business owners have to pay themselves.
However, most business owners certainly choose to. After all, being paid is an incentive to produce good work.
You may choose to pay yourselves in a number of ways. For example, one or both of you may become employees of the business and be paid on a regular basis.
Whether you choose to pay or not pay yourselves, it is important to detail this in the relevant agreement between you and your partner.
Having a solid written agreement will avoid any conflict between you and your partner about your pay.
What If Your Relationship Breaks Down?
Going through a relationship breakdown can be tough.
It will be even tougher if you and your ex spouse/partner have a business together and don’t have the necessary legals in place.
This is why it is so important to have relevant written legal agreements in place between you and your spouse/partner when starting a business together.
Having an appropriate agreement in place will make it very clear what will happen in the event of your relationship breaking down.
Need More Help?
Starting a business with your spouse/partner can be really exciting.
But it is really important you have the correct legals in place for the sustainability and benefit of your business.
It is vital you have an agreement in writing between you and your spouse/partner outlining exactly how you intend your business and business relationship to function.
Our co-founder has answered some key legal questions when it comes to starting a business. If you’re running a business with a partner, these tips could save you from some legal headaches later down the track. Watch the video here:
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