business partners

CHAPTER 4

Business Partners

 

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This chapter is all about relationships — specifically, the relationships between you and your co-founders or business partners. It’s important to give this aspect of your business serious consideration before things go full steam ahead and you find yourself busy with everyday business operations!

In this chapter, we’ll highlight the most important points you should be thinking about with your co-founders when starting a business together. We’ll also outline the key legal agreements you’ll need, and how they work.

Get it right from the start

Before you go into business with others, it’s essential to be mindful of the risks that could come up as your business grows. Things might seem all good between you and your co-founders right now, but team dynamics can change quickly in business, especially in the face of all sorts of unexpected challenges being thrown your way.

It’s just easier to ensure you’re all set up properly from the beginning. It might seem like another time-consuming step in the process and yet more paperwork, but we can assure you that a little extra investment now will save you from big headaches later on. Have the discussion early on when it’s much easier to sort out potential issues that might come up.

What legal documents do you need?

The legal documents you need between you and your co-founders will depend on the business structure you choose.

If you have a company structure, you and your co-founders or business partners will be shareholders. In this case, you will need a Shareholders Agreement.

If you have a partnership structure, you will all be partners. In this case, you will need a Partnership Agreement.

steps for partnership agreement and shareholders agreement

While there are some differences in the details between these two types of agreements, the main purpose is the same – they are a formal, written, legally binding agreement that will govern the relationship between you and your co-founders. You’ll be able to refer to the agreement in the future should any conflict or confusion arise – and you’ll be grateful for this if you find yourself in the middle of a stressful business situation!

What goes in the agreement?

What is included in your agreement will depend on your individual business requirements, but typically it will address questions like:

  • How are important decisions made?
  • How are disputes handled?
  • How long do you expect each person to stick around?
  • What happens if someone wants to leave?
  • How is profit and loss distributed?

Sometimes you can also specify the roles and responsibilities of the co-founders, so that each person’s expected contributions are clear.

In a Shareholders Agreement there are some specific issues to include, such as:

  • How are shares allocated?
  • When can shares be issued and sold?

In a Partnership Agreement there are some specific issues to include, such as:

  • What is the purpose of the partnership?
  • How long is the partnership intended to operate for?

When drafting an agreement, it’s best to avoid the use of templates. There’s no set formula for a business agreement. What you choose to include will depend on your individual circumstances, the unique relationships between you and your co-founders, and the requirements of your business.

On the following page, we’ve set out a couple of key issues that would usually be covered in Shareholders or Partnership Agreements, and some of the different ways that they can be dealt with.

 

We’ve set out a couple of key issues that would usually be covered in Shareholders or  Partnership Agreements, and some of the different ways that they can be dealt with.

What happens on sale of business?

One of the key functions of your Shareholders Agreement or Partnership Agreement is setting out how the business makes important decisions.

For some big decisions, such as selling the business, you may require unanimous agreement of all shareholders. For other less important decisions, you may just require a majority. There are many ways you can go about it, so chat to your co-founders about what options would be best for your business.

What happens if someone leaves?

Another key element is setting rules for what happens if someone leaves the business. It’s hard to think about when you’re just starting your business journey together, but unexpected situations arise and circumstances change, so it’s important to be prepared for anything.

In a company, you may want to have a clause stating that if one shareholder wants to leave they must offer to sell their shares to the remaining shareholders before anyone else. These are called pre-emptive rights clauses or first right of refusal clauses.

In a partnership, you may not want the partnership to dissolve if one of the partners leaves. Instead you’ll need to have another plan in place, such as a clause stating that the partnership will continue to operate even if one of the partners leaves. Something else to think about – what do you want to happen to the assets and debts of the partnership at this time?

A good lawyer can help you with negotiating with your co-founders and documenting your formal agreement in a binding format. They can also force you to think about the hard questions you may have skirted over throughout your discussions.

At sprintlaw, we help small businesses all the time to get off the ground with solid legal agreements in place. If you think you need some help with this, contact us!

In conclusion…

In this chapter, we’ve learned that it’s essential to be mindful of the risks that could come up as your business grows and develops. That’s why it’s important to put agreements in place – whether it be a Shareholders Agreement, Partnership Agreement or some other agreement. It might seem like another time-consuming step in the process and yet more paperwork, but we can assure you that a little extra investment now will save you from big headaches later on.

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