Starting a business with another person is a very exciting and daunting prospect. It can be very easy to get caught up in the whirlwind of opening the doors of your new enterprise and not give any thought to the legal formalities. Putting parameters around your business relationship at the outset will provide certainty and savings down the line.
Whether you set up a partnership with someone or you hold shares in a company with others, you should put in place a document which sets out the basic formalities of your business relationship and the path for development of your business.
Where a company is incorporated to develop a business, the company will have a constitution which sets out key obligations and rights for directors and shareholders but the company’s constitution is not a substitute for a shareholders agreement.
A shareholders agreement will set out your rights and obligations as a shareholder on the company. It should at a minimum deal with control of the company, distribution of profits and provide for an exit strategy. It can also deal with items such as third party approaches to share acquisition, conflict of interest, replacing directors, death and incapacity. Specific clauses would consider items such as
• whether all shareholders work in the business and the financial returns to those working v those not;
• where a founding shareholder leaves – what is their entitlement regarding a return?
• When can a founding shareholder be removed as a director?
• What is the overall goal for the business?
Agreeing how you wish to deal with these and other matters at the outset when relations are good will be easier than trying to reach agreements after there has been any difficult conversation. Having the agreement to rely on should prevent a dispute escalation which will should also retain shareholder value and ensure there is no disruption to third party relationships.
If you chose to operate as a partnership the same advice applies, having a partnership agreement is vital first step.
Throughout the business relationship the agreement should be reviewed and updated as necessary.
If you have any questions about incorporation or drafting a shareholders agreement or partnership agreement, please contact Caroline Meaney at [email protected] or call our office at 061 414 355.