Ashley Sutherland, Corporate Associate Solicitor at Hegarty Solicitors explains how new businesses can ensure they have the correct contracts in place.
When you are a new start up, your main focus will be on winning new business and securing orders. Whilst having properly drafted terms and conditions is a key element, one thing that usually gets pushed aside (but is also extremely important) is regulating your internal business relationships. These corporate governance documents will help people understand their responsibilities and protect your business if things go wrong between you and your business partners.
The type of contract you need depends on the type of business you have set up.
Going into partnership is the easiest business structure, but partnerships can be fragile and there is little regulation to govern the partnership structure. A well drafted Partnership Agreement ensures that key elements of running the business are carefully detailed, such as; the decision making process; implications of a partner retiring; in what circumstances a partner can be removed and how capital is divided.
Limited Liability Partnerships (LLPs) are commonly regulated by LLP Agreements which work very much in the same way as a Partnership Agreement, detailing the essential elements of how the LLP is run. Ensuring that your agreement is accurate and in line with your business plan gives you peace of mind that measures are in place to protect you from problems in the future.
Company Articles of Association
Unlike partnerships and LLPs, all limited companies are governed by Articles of Association (Articles). These Articles act as a company’s “rule book” and govern the way directors and shareholders interact with the company. Many businesses use standard Articles when they incorporate but these may not reflect your objectives and requirements. Articles are a publicly available document. If you have confidential arrangements, you will need a shareholders agreement.
A properly drafted Shareholders’ Agreement will set out the relationship between the shareholders. This will include the terms governing the issue and transfer of shares, which may prevent shareholders from getting rid of shares to an unknown third party, for example. It could also include restrictions on the shareholders from competing with the company, poaching staff and disclosing confidential information and can set out the financing structure, decision making and banking requirements.
Out of date or poorly drafted contracts leave you vulnerable to risks and may mean that you are not operating on the most favourable terms for your business.