Every firm of Estate Agents should have one!

Partnership & Shareholder Agreements – Getting the business structure right.

Why do you need a partnership or shareholdersagreement?

Whether your business is a partnership, LLP or limited company, unless you are the sole owner, you should have an agreement between the owners to cover the key issues that concern the ownership and management of the business- capital, profit shares, decision-making processes and introduction/departure of shareholders or partners.

While a limited company has Articles of Association, usually in a standard form, they are unlikely to cover all the key concerns of shareholders. As for a partnership or LLP (limited liability partnership); there is no standard constitution and it needs to be created. Otherwise, in the case of a partnership, the fallback position if there is a dispute among the partners, is the Partnership Act of 1890.!

For example without an agreement do you know what happens if:

  • One of the shareholders or partners wants to sell their interest to another member or to an outsider,

  • A majority want to sell the business but a minority do not,

  • One of the shareholders/partners dies?

So it is essential to have a written agreement that covers arrangements between the partners or shareholders, with regard to both ownership and management of the business. These are summarised below. ContractStore.com has a free checklist to show what is needed

Capital & Earnings

The agreement will usually specify the initial capital contribution of each of the shareholders or partners -this may be in cash or other assets, e.g. an invention or property.

Also loans to the business from any of the members should be documented.

In a limited company, which will pay tax on its profits, the shareholders who are also directors working in the business are likely to have an employment contract as well as dividends.

In a partnership or LLP , where each partner pays income tax on their share of profits, the agreement will specify the profit share of each partner and, usually, provide for each of them to draw an agreed amount each month from the income of the firm on account of their profits for the year as well as saying what happens if drawings exceed the available cash or there are losses.

Management structure

A limited company has a two-tier structure: the shareholders own the company and appoint a board of directors to manage it on their behalf. Some, if not all the shareholders are usually directors.

The shareholders agreement will stipulate the frequency of board meetings, their location, voting rights and other administrative details. Also, where a company is majority owned by the managing director, the agreement may specify that a board resolution requires his/her vote and not just a simple majority. Indeed, could apply at shareholder meetings as well as board meetings. But to achieve a fairer balance, some key decisions may be listed that require the consent of all or substantial majority of the shareholders.

A partnership or LLP agreement needs to establish the management structure for the business. It will identify arrangements for partnersmeetings, voting rights and any decisions that require a special majority. A large partnership may have a management committee or management board, comprising a smaller group of partners who make most of the decisions i.e., like a limited company. In an LLP, the law requires two of the partners (or members) to be registered at Companies House as designated members’ – i.e. responsible for filing the annual accounts etc.

Changes of Ownership

A private limited company does not normally allow a shareholder to sell their shares to an outsider. The shareholders agreement will have a procedure for allowing someone who wants to sell to offer their shares to the other shareholders. If they agree to buy, the price will be agreed or decided by a firm of accountants. But if they do not agree to a sale, the shareholder will remain. Sometimes the agreement will have a clause that allows for the company to be sold to a third party if a specified majority of shareholders agree. And in the case of shares being issued or transferred to a new shareholder, they will usually be required to sign a ‘deed of adherence’ up as a party to the shareholders; agreement.

In a partnership or LLP, the agreement will say what notice a partner has to give before retiring and how his capital and profit share will be calculated and paid out. And there will be terms for bringing in new partners.

All these agreements also need to deal with the possibility of sacking a shareholder or partner who causes problems or breaches the agreement.

Confidentiality and Non-Competition

Every owner should be subject to confidentiality restrictions. More important, there should be restrictions on any shareholder or partner having an interest in a competitor. These clauses will last after someone leaves for an agreed period and may also prohibit a former member from poaching staff as well as clients.

if you do not already have a shareholders agreement, partnership agreement or all LLP agreement for your business, ContractStore.com has over 250 templates for business including a variety of business structure agreements that can be downloaded from www.contractstore.com . ContractStore also has free advice, checklists and videos

Giles Dixon is a solicitor and a founding director of ContractStore.

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