How Ownership Agreements Can Help Protect Your Business
Whatever the size or shape of your business, it is a legal entity and needs to be treated as such. Any business needs a structured approach that outlines the division of shares, responsibilities, the legal framework and management structure. Agreeing on this from the outset will save a business from prospective problems further down the line when key decisions need to be made. This applies whether you are a family business, partnership, SME or a larger corporate business.
There are a number of elements that should form part of a typical ownership agreement, and while these will differ depending on the structure of the business, some basic guidelines can be followed.
Ownership agreements need to formalise some basic details surrounding the business, namely:
- Rules relating to the admission of new partners or shareholders, and the withdrawal of the same
- Rules on the dissolution of the partnership or business
- Accounting methods used
- When meetings are held and annual reports posted
- How business owners will extract profits from the business and rules around this
- Restrictive covenants to protect the business and fellow business owners
Profit-sharing and dividends
Here you can detail the specific shareholding each owner/partner has in the business. This then dictates the profit-sharing and dividends. In a partnership, for example, each partner contributes capital in the form of equity. Profit and loss distribution can then be allocated according to an agreement on whether it is an equal sharing or a fixed shared amount.
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These are a party’s consent to be legally restricted by something if they leave the business in the future. In a business ownership sense, this can relate to one or more of the following:
- One party agrees not to compete with the other, usually within a specific time period or within a geographical location.
- One party agrees not to poach staff or customers from the business.
- One party agrees not to deal with certain customers;
- One party agrees not to use ideas, trade secrets or specifications held by the business.
Succession and exit planning
You will need an agreement in place to detail the process for how a co-owner should approach selling his/her share of the business. This is in terms of business continuity and so needs to address capital as well as skills and responsibilities that will need replacing. A procedure is required to ensure processes and operations continue as normal and any change in ownership is not to the detriment of the business.
It needs to be formally recognised what day-to-day responsibilities key people have and what levels of authority exist. In other words, what decisions can be made and by whom, and what authority certain people have. This will involve people who are not necessarily co-owners of the business.
Other elements of an ownership agreement
An ownership agreement also has to outline how sales and acquisitions are dealt with, how disaster planning and business continuity is formally recognised, compliance and regulatory matters and ongoing business health checks.
Ultimately you should take good legal advice on how your ownership agreement is structured, but clearly it is much cheaper and easier to set all this out upon starting the business, as this will help resolve any disputes that may arise at a later date. It could, indeed, help avoid any disruptive legal cases which may arise as a result of ownership disputes in the future.
We strongly recommend that you contact a solicitor to ensure an ownership agreement exists from the outset.
Straight talking advice on Ownership Agreements from Yorkshire Powerhouse
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