Is your business being run by more than one person? If so, do you have a plan if you fall out?
Business relationships, like marriages, do not always work out.
When business relationships start out, the air is generally full of optimism but in reality the actual monetary value of the business is likely to start off small. As relationships develop and the business grows in value, perspectives can change which can lead to heated disputes.
In order to avoid disruption to your business whether it’s being run as a partnership, limited liability partnership (LLP) or a limited company, an agreement can be put in place which will typically deal with:
- What the respective parties are contributing to the business; · How the business is to be funded;
- How the business is to be managed and decisions taken;
- How the business is to be valued in the event of a split;
- In the case of limited companies, whether shareholders are entitled to transfer their shares;
- What happens if a partner or shareholder dies;
- In the case of limited companies, when shareholders may be required to hand back their shares;
- Whether the business can be sold to a third party;
- In the case of partnerships and LLPs, whether and in what circumstances partners can be expelled from the partnership;
- In the case of limited companies, who shareholders can be required to transfer shares to;
- How new partners or shareholders can be brought into the business; and
- Whether a party leaving the business is restricted from competing with it.
Deciding on core principles when you start out can smooth disputes which would otherwise be extremely disruptive to your business. If there is a procedure in place to deal with deadlock, it can provide an alternative to costly litigation and avoid the business having to cease trading whilst the litigation was ongoing.
If there is an agreement in place, you have a plan you can stick to. If no agreement in place, the parties may be able to agree that one party buys the other out but if you are at loggerheads, this can prove difficult and it will be hard to continue to focus on your core business.
If there is absolute deadlock in the case of limited companies, they can be put into liquidation (either solvent or insolvent), a party can apply to the court to have the company wound up on the basis that it is just and equitable to do so or one party could apply to the court on the basis of unfair prejudice. Similar routes are available in the case of partnerships and limited liability partnerships.
Litigation in whatever form is costly, time consuming and stressful on the individuals and the net result is often that there is no business left to be taken forward, goodwill will have been destroyed or at best badly damaged and there may be little left for the parties to take from the assets of a company once the litigation has been paid for.
Putting an agreement in place when the going is good can avoid these potential unpleasant circumstances arising and can leave all parties with peace of mind for the future. It can also protect employees from the potentially damaging fall out that could occur.
Legal Services for Business provides advice on company law to businesses across London, Hampshire, Surrey and Berkshire. My details are listed below should you wish to contact me.