Starting a business is hard. Whether you are starting from scratch or acquiring an existing business, the transition to business owner is a daunting prospect. You are more likely to succeed if you combine your skills with others. Whether it’s a friend that you have shared a common dream with for many years, a colleague that knows your industry as well as you do, or a mentor who has taken you under their wing. However, co-owning a business with another person presents its own unique challenges. You must address these so that your relationship with your business partner is not affected.
From a business structuring perspective, you can co-own a business in a number of different ways (e.g. companies, unit trusts, partnerships and joint ventures all involve a form of ‘joint enterprise’ with others). In most cases, you will likely talk to your accountant about your plans. A good accountant will explain the different tax treatment between partnerships, trusts and companies. The will also recommend an option which best suits your needs. Once you have decided upon an appropriate business structure, your accountant will usually establish it for you. The documents which they prepare are your business’ “structure documents”.
Most people already have an idea as to how the relationship with a co-owner will operate. You will probably divide the various roles between you based on skill set and strengths. In order to safeguard the business, these discussions should be formalised in an agreement between all co-owners. These are what we call the “relationship documents”. Relationship documents differ significantly from the documents put in place to establish your business structure (i.e. the structure establishment documents). I’ve set out the differences between the two sets of documents below:
Trust deeds and company constitutions are ordinarily standard form documents. They contain the provisions required to give effect to a particular business structure. While these documents may bring about the tax consequences that your accountant has recommend, they will not be tailored to your specific business. They are also not concerned with the practical arrangements between you and your co-owners. For example:
Say your accountant advises three separate clients to implement a unit trust structure for their three separate businesses. The three trust deeds will be identical notwithstanding that the three businesses are completely different to each other.
The standardisation of these documents is a good thing. It ensures that your accountant can manage your tax affairs with the confidence of knowing that your structure documents are capable of achieving the tax outcomes that they are intending to achieve.
Relationship documents supplement (but do not replace) the standard form structure documents. When done properly, no two relationship documents will be the same. They take into account your specific needs in order to document your relationship with your co-owners.
Types of relationship documents
The documents required to document your relationship with your co-owners will vary depending on your actual business structure. The most common options are:
- Shareholders’ Agreements which document the relationship between the shareholders of a company;
- If your business is operated via a unit trust, a Unitholders’ Agreement will document the relationship between the unit holders;
- Some professionals (e.g. doctors) operate as associates, in which case their relationship will be documented in an Associateship Agreement;
- A Partnership Agreement documents the relationship between partners; and
- A joint venture (e.g. in relation to a property development) will require a Joint Venture Agreement.
Issues addressed in relationship documents
A well drafted agreement between business owners will, among other things, typically:
- Identify each party’s role in the business;
- Establish a dispute resolution procedure (e.g. by requiring mediation);
- Put in place a dividend/profit distribution policy;
- Deal with additional funds contributions (e.g. via capital or loans);
- Establish decision-making criteria (e.g. which decisions can be made by a simple majority of votes and which will require all of you to unanimously agree);
- Include a procedure governing the entry and exit of new parties to the venture (i.e. what happens if one of you wishes to retire); and
- Include provisions dealing with the death or permanent incapacity of an owner in the business.
While your structure documents are put in place when you start your business, a relationship document can be implemented, modified or replaced at any time. Having said that, the ideal time to discuss the range of topics which will be covered in a relationship document is at the outset of your venture. This is when you and your co-owners are most enthusiastic and optimistic about your business, making it the ideal time to have what can be a difficult conversation about how you intend to operate.
You may assume that your structure documents also include the provisions required to properly manage your business and resolve disputes between you and your co-owners. Unfortunately, when disputes do arise, the standard form structure documents do not contain the depth required to be of any meaningful assistance. That is why it is imperative that your relationship with your co-owners is properly documented in a tailored set of relationship documents.
If you are in business with an associate, partner or family member get in touch to talk discuss how to best document the relationship between you.