Thinking of starting a new business partnership? Wanting to take on a new business partner?
One of the most important relationships you will ever have is with your business partner(s), so it is very important that you start out in agreement with them and that you have this documented.
You generally have four options when going into business with your new business partner:
- Partnership
- Unit Trust
- Company
- Discretionary Trust
However, unless you are going into business with your spouse then a Discretionary Trust is generally not advisable.
Partnerships
When you create a new Partnership, it can be formed by a standard agreement under the Partnership Act. This agreement assumes equal shares and rights, but this might not be right for everyone. Therefore, when forming a Partnership you should consider creating a Partnership Agreement that will create a new set of rules for your Partnership. This type of agreement will be largely bespoke, as it is vital that it covers off the issues that are important to you as well as including details such as:
- Entry and exit options
- Remuneration or partnership share
- Decision making
- Valuation
A Solicitor will arrange such an agreement for you.
Companies
A company is formed under a set of rules called the constitution. These are generally a set of off the shelf rules based on the Corporations Act and must be obeyed. However, you may have additional requirements which should be covered in a Shareholders Agreement. Like a Partnership Agreement, this should be a largely bespoke document that helps protect against any issues that may arise. Thus, it is important that it covers details such as:
- Entry and exit options
- Remuneration
- Decision making
- Valuation
Once again you should contact a Solicitor to arrange such an agreement for you.
Unit Trusts
Unit Trusts are formed under a set of rules called a Trust Deed. This sets out the trust rules, but in some cases, this will not be sufficient for your needs. Therefore, additional rules can be covered in a unit holders’ agreement. You should contact a Solicitor to arrange such an agreement for you.
Where to Start
To get started, you should sit down with your prospective Partner(s) and build your own Heads of Agreement. This document is your chance to sit down and discuss what you each want to achieve. Forget the legalese at this point, your Solicitor will write all those clauses for you. This document should include:
- Working arrangements, you have agreed between yourselves
- Roles, remuneration and decision making
- Any principles you have agreed to.
You may find it helpful to ask a colleague or mentor (ideally someone that knows you all) to help you with this by sharing their thoughts, they may have some valuable suggestions. If you’ve done well, your Heads of Agreement should do two important things:
- It will bring up many of the things that you might have assumed you agreed on as future partners and give you a chance to discuss them up front and gain consensus (better this happens before you start) and
- Will serve as a useful guide for your Solicitor about the issues that you want to include in your Partnership or Shareholders agreement.
In addition, don’t forget that if you are a Small Business Entity (turnover of less than $10 million) any expenses incurred on professional advice about Shareholder or Partnership agreements from your Accountant or Solicitor are tax deductible.
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