Do We Need a Business Pre-Nup?
Written by: Gabrielle Andersen | Insight Team
Welcome to our Insight Close-Up series, where we delve into the most common commercial and business law services we offer our Canny Group business clients.
This series will focus on the following topics relevant to most business owners, and will be released monthly throughout this year:
- Service Agreements + Terms and Conditions
- Independent Contractors and Subcontractors – What’s the difference?
- Employees + Employment Agreement
- Protecting Your IP and Business Know-how
- Do I Need A Policy For That? What Exactly Is Compliance?
- Do We Need A Business Pre-nup?
- What is the PPSR and how can it help my business?
- Dealing with disagreements with customers
If any of this sounds interesting, stay tuned as we’ll be letting you know when each Insight Close-Up instalment drops. But if you simply can’t wait or need advice on any of these topics today, contact our Canny Insight team.
Do I Need Legal Advice? What do We Mean By Business Pre-nup?
Essentially, we are referring to any documents between the owners of a business that set out their roles and obligations within the structure running the business, and their relationship with one another.
For a company, this is a Shareholders Agreement; for a partnership, it is a Partnership Agreement; and for any joint ventures between two or more distinct and separate people or entities, it is a Joint Venture Agreement.
While often neglected at the commencement of a business – particularly given everyone’s focus is initially on getting things up and running and profitable – the best time to prepare and agree on these documents is during the initial “honeymoon phase” of a business. That’s why we’re referring to these documents as “business pre-nups” – similar to a prenuptial agreement between a couple prior to marriage, they govern important matters that may arise during the relationship between shareholders or partners, and more importantly, what should occur when any disputes arise.
Legal Questions: What Types of Agreements Can Be Considered Business Pre-Nups?
As outlined, the main agreements we would consider to be considered to be business pre-nups are Shareholders Agreements, Partnership Agreements and Joint Venture Agreements.
Not sure which business structure is best for you, or even what’s out there and what they mean? Check out this previous blog we put together: A Legal Guide To Business Structuring.
But for now, let’s take a brief look at the main characteristics of each of these contracts…
Shareholders Agreements
A Shareholders Agreement is a contract between the shareholders of a company, which sets out the relationship between the shareholders and the directors of the company and how certain matters are to be managed and decided between the shareholders or the board of directors.
Shareholders Agreements can vary depending on the size and nature of the structure of the company, but essentially all will address the following key points:
- What matters are to be decided by votes between shareholders or the board of directors, and the percentage of votes required for each matter;
- The appointment and removal of directors;
- How shareholders are able to increase or dispose of their shares;
- How further shares in the company are issued; and
- How issues or disputes between shareholders are to be resolved.
Many business owners would not have turned their minds to these issues when setting up a company with another business partner. As all the above matters impact their financial interest in the company everyone is invested in growing, it is easy to see how disagreements on how these issues should be dealt with could occur with even the most cooperative business owners. This is why having a contract between you that clearly sets out what has been agreed is a really important way to prevent issues arising down the track.
Wanting to gain more of an understanding of if you fit the criteria for needing a Shareholders Agreement? Check out this previous blog we put together: Growing Your Business – Shareholders Agreements.
Partnership Agreements
Similar to a Shareholders Agreement, a Partnership Agreement is a contract between partners in a business.
Legally a partnership is very different to a company. A company is a separate legal entity meaning it can sue and be sued in its own right, however, in a partnership all partners are personally liable for any liabilities of the partnership.
It is for this reason that partnerships are not as common a business structure, however they do still exist.
If you have decided that a partnership is the most ideal structure for you and your business partner, you might not have considered the necessity of a Partnership Agreement. Once again, this document outlines each of the partner’s duties and responsibilities both to one another and importantly, to their business. This is a way of holding each other accountable and ensuring that each is contributing to the business in the way originally envisaged.
The key features of a partnership agreement are:
- The obligations and rights of all of the partners;
- How each partner’s contributions, profits and losses are split;
- How decisions should be made within the partnership, and what matters require a majority or unanimous vote;
- How disputes between the partners should be managed; and
- When and how the partnership can be terminated, or how individual partners may exit the partnership.
Again having all of these matters dealt with in a formal contract can reduce the likelihood of issues arising between partners, or at least give everyone a formal understanding of how such issues should be resolved. As with all of what we consider to be “business pre-nups”, we recommend having these contracts prepared at the time that you have chosen to run the business with another partner.
Joint Venture Agreements
A Joint Venture Agreement is a contract that is between two or more people or separate businesses, companies or organisations who have decided to work together for a specific purpose or project.
Joint Venture Agreements can vary significantly depending on the nature of the project or purpose, and the entities involved, but these contracts will usually address the following matters:
- A clear definition of the project or purpose, including its scope and timeframe;
- The financial contribution of each party;
- How the joint venture is to be structured;
- The obligations, duties and roles of each party;
- Who owns any intellectual property or other assets produced by the joint venture;
- How the profits and losses are to be divided;
- When and how the joint venture may be terminated; and
- How disputes between the parties are to be resolved.
A Joint Venture Agreement can be a really important contract as while the joint venture itself might only be a temporary arrangement, it is between completely separate entities who might have very different ideas or approaches to how the project or engagement should be run.
It is even more crucial that Joint Venture Agreements are prepared at the commencement of the venture as this document will reflect exactly what was agreed upon at the outset and be useful for everyone to reflect back on.
Legal Support For Small Business: At What Stage Will My Business Require These Agreements?
While these documents can be prepared at any stage of a business, having them prepared at the earliest opportunity benefits everyone because that is usually the time when the most practical and positive discussions can be had between business owners, before any issues have yet arisen.
As your business grows and you take on more shareholders or partners, you may wish to have these documents reviewed and amended to suit the circumstances at that time.
At Canny Insight, we want to help our business owners protect their future. That is why with our In-House Experience Package, we incorporate the preparation of either a Shareholders Agreement or a Joint Venture Agreement into our 12-month package of services, so that all aspects of your business interests are covered.
Take a look at our packages to see how we can help your business today!
How Canny Insight Can Help Your Business
Canny Insight is a customised legal service that meets the specific needs of your business. If you’re a start-up, or gearing up for growth and expansion, we’ll come up with a legal services package aimed specifically at your business needs.
Whether you need written policies or procedures, new Service Agreements or Terms and Conditions, or a review of your contracts with workers or other businesses, our business law-focused Insight team will provide you with straightforward and reliable advice and contracts.
Get in touch with our team today to see how we can help your business!
The content of this article is for general guidance purposes only. Specialist legal advice relevant to your circumstances should be sought if required.