Partnership Agreements
A partnership is a relationship that exists between two or more people who are carrying on a business with the common view of profit. As a business structure, partnerships are a simple, flexible and, if properly established, are effective arrangements. It is important to seek legal and accounting advice to determine if a partnership best suits your business’ needs, as both disadvantages and advantages arise in relation to the establishment of a partnership (such as the joint and several liability of partners).
Once a partnership is agreed upon, it is imperative to document the terms of the partnership, as the initial costs will far outweigh the unnecessary legal costs and disputes that may arise if and when the partnership ceases or when a partner wishes to retire or leave due to illness or death.
It may also be worthwhile to include in this document buy sell provisions as explained below.
Shareholder Agreements
Shareholder agreements are contracts between the shareholders of a company in which they agree to regulate the exercise of some of their rights as shareholders. A shareholders agreement is a supplement to the company’s constitution and will generally regulate shareholders rights and regulate the management and operation policy of the company.
It may also be worthwhile to include in this document buy sell provisions as explained below.
Buy-Sell Agreements
A buy/sell agreement sets out an arrangement designed to protect the interests of the departing owners in a business and the remaining owners, while preserving the business itself.
There are some key issues to be addressed in a buy/sell agreement, such as:
- The trigger events for a sale of an ownership interest – not just death and TPD, but also if an owner retires, becomes bankrupt, disappears from the business or ceases to be employed or active in the business (eg performance issues) as required;
- The criteria to value the business;
- The transfer aspects of the transaction (ie the sale conditions); and
- The sale price and funding arrangements.
A buy/sell agreement is a contract usually entered into between business shareholders pursuant to which the surviving shareholders are bound to buy out the other partner’s / shareholder’s interest in the business should a specific event occur.
The agreement is often linked to an insurance policy on each partner’s / shareholder’s life. The policy provides the surviving shareholders with the money to be able to buy out the deceased/disabled/departing partner’s / shareholder’s interest.
Generally the agreement is structured in such a way that it does not matter what business structure has been used to own the business i.e. family trust, company, shareholders.