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Business Structures

When commencing a new business venture with colleagues or introducing new co-owners to your business, it is critical to consider your business structure.  This will ensure that there is a well-defined management structure and a clear understanding of what is to happen if a co-owner departs, voluntarily or involuntarily.

Common business structures include:

  • Company
  • Partnership
  • Trust
  • Joint Venture

No matter which structure you select, the critical matters to identify, record and implement are:

  • Who can make decisions as to the day to day operations of the business?
  • What decisions should be made by all co-owners?
  • If a co-owner wants to leave the business, what procedure should apply to that?
  • Can a co-owner be forced to leave the business?
  • What happens if a co-owner dies?

We can assist you in preparing an agreement regulating some or all of these issues.

As for involuntary departures of co-owners (usually due to death or total and permanent disability) and for some voluntary departures (such as retirement), then this can be dealt with under a Business Succession Plan.

What is a Company structure?

 A company operates as a separate legal entity with its day to day decisions being made by its directors and the benefits of the company's business being held for its owners, the shareholders. A company structure protects the shareholders from being liable for expenses or costs of operating the company's business. In other words, the shareholders enjoy limited liability.

What is a Shareholders' Agreement?

A Shareholders’ Agreement is a legal agreement which governs the rights and obligations of each Shareholder in dealing with the company’s business and with each other.

What rights might a Shareholders' Agreement govern?

The agreement may cover:

  • the voting rights of each shareholder;
  • the right of each shareholder to nominate and appoint a director;
  • the rights of the directors to make decisions;
  • the rights of the shareholders to make decisions of a more substantial nature; and
  • the right to deal with the shares held by the shareholder.

What obligations might a Shareholders' Agreement govern?

The obligations of the shareholders may include:

  • the obligation to provide money to the company for its establishment or for working capital;
  • the obligation to work exclusively in the business of the company;
  • the obligation not to sell shares or allot more shares other than as agreed among the shareholders; and
  • the obligation to only deal with the shares held by a shareholder in accordance with an agreed process.

What else might a Shareholders' Agreement govern?

Shareholder Dividends

Arguments can arise as to whether profits of the company should be paid as a dividend and if so, at what rate. 

Provision can be made allowing total flexibility as to decisions of that nature or, alternatively, provision can be made for a minimum annual dividend rate.

The sale of the shares of the company to a third party

This may arise where there is a takeover offer for the company and provision can be made that, for example, 66% of shareholders making a decision to accept the takeover would force all shareholders to sell their shares.

This is known as a “Drag Along Right”.

A shareholder needs to be expelled

Sometimes it becomes necessary for this drastic action to be taken, particularly if the shareholder has acted improperly or has been convicted of a serious crime.

Transfer of the shares in a shareholding company

Where the shareholder in a company is itself a company, often this is only as a tax vehicle and the intention is for the primary person behind the shareholder company to be involved in the operations of the company. 

Without provision in the Shareholder Agreement, a corporate shareholder could change its structure such that an individual other than the initial primary person could become the owner of the shares in the corporate shareholder. 

This effectively would mean a change in the “Partnership” which originally existed between the various corporate shareholders.  A Shareholders’ Agreement can regulate this.

What if I establish a Partnership rather than a company?

Although the Partnership Act 1892 (NSW) applies to partnerships, it is preferable to set out the rights and obligations of the partners in an agreed document.

What rights might a Partnership Agreement govern?

The Partnership Agreement would govern the rights of partners to manage:

  • the day to day operations of the business;
  • the right to participate in the profits of the business; and
  • the entitlements of the partners on termination of the partnership.

What obligations might the Partnership Agreement govern?

The obligations of the partners might include:

  • a requirement to work exclusively in the business of the partnership;
  • the relative obligations between the partners as to any losses in the business; and
  • the obligation to join in the sale of the partnership’s business upon certain events.

What if I establish a Trust to operate the business?

A Trust is not an entity in its own right. It must have a trustee which will control the operation of the Trust and the Trust’s business.

Normally, for limitation of liability and ease of operation, the trustee will be a company and the Trust will be a Unit Trust (meaning that the co-owners will hold shares in the company which is acting as the trustee and will hold units in the Trust). 

An agreement can be put in place, similar to a Shareholders’ Agreement which regulates the trustee and the unitholders.

What is a Joint Venture?

Commonly, a Joint Venture is set up among separate business owners but with a common business purpose; each joint venturer bringing to the venture, its expertise.

The structure is normally an incorporated Joint Venture where a new company is established to commence, or continue, the common business venture and each venturer holds shares in that new company. This relationship is usually governed by way of a Joint Venture Agreement with similarities to a Shareholders’ Agreement.

There are advantages and disadvantages to any of the business structures outlined above. Choosing the right business structure will depend on a number of factors.