Shareholder, Partnership and Unitholder Agreements

Standard company constitutions, Unit Trust Constitutions and Partnership arrangements that are used are not sufficient for many normal commercial circumstances.

Standard Pty Ltd Company

Where there are 50:50 shareholders and 2 Directors, a standard company - without either a customised constitution or a shareholder agreement - is particularly vulnerable in the event of the Directors falling out.

In these circumstances the Directors are 'handcuffed' together - where nothing can be done in the company since no one has control without the other, and no control can be taken by shareholders since they reflect the same interests. 

In this situation the company often ends up in administration, and the shareholder can lose a lot of the value of the company assets.

There are many solutions - as many as each circumstance - if a Shareholder Agreement is used to tailor the company constitution and stakeholder management to the circumstances of the people involved. One solution inthis above situation for example, is to have a shareholder agreement that is clear on what is to happen in a dispute, and / or who is to have control over what speific company decisions, so that the company is never left unable to act.

Partnership

Partnerships can have the similar problems - where all partners often have to agree on a course of action for it to be effected.

For example all partners in a common law or simple partnership that owns a property or a business will have to all agree to sell out of that property or business. So even a person who contributed only 5% of the funds will be able to refuse to sell out and prevent the other 95% of the partners from selling. There are legal remedies to this through the courts, but a Partnership Agreement at the start of the partnership can be a much cheaper remedy.

In addition, you can end up in a partnership without necessarily intending to, if you conduct business with people and dont formalise the arrangement in writing. This is because partnerships are often created at common law and seen to be created by the courts through people's conduct. Many people are not aware of what conduct demonstrates a common law partnership, and so are not necessarily always aware when they have entered into a partnership. Having arrangements advised on and documented can ensure that your conduct is consistent with the intended arrangement, and prevent you inadvertendly entering into a partnership. 

Whenever you agree to do anything in in conjunction with another person or entity we recommend you get advice, and if necessary (if it is a partnership) get a partnership agreement documented. A Partnership Agreement will allow you to stipulate things up front - so you know what your exposure is - including who are the entities entering into the partnership. 

A benefit of documenting the Partnership Agreement at the start is that misunderstandings and resulting arguments can be prevented by ensuring all partners are 'on the same page' with the proposition being agreed to.

Other benfits of a Partnership Agreement being documented are that if the partners can't agree on the major terms - they can stop there - and extricate themselves at the start, which is much simpler and cheaper than having funds locked into a venture where the parties are in dispute. 

One can have a partnership of entities including of trusts or companies - documenting a Partnership Agrement at the start of a venture can assit with plannign, budgeting nad minimising (lawfully) teh taxes taht are payabl on a venture and as well as assist in the capital budgeting for future investmenr capital required by the venture.

Finally, a Partnership Agreement confers identifiable legal right to business or venture equity, and this is able to be inherited through an estates process by your beneficiaries if planned and documented correctly.

Unit Trusts

These are similar to private companies in that they are majority rule by default, but that the constitution creates different classes of units (as there are different classes of shares) that can complicate this.

Importantly the trust pays no tax and all income and tax liabilities flow to the unit holder who is liable for these.

Given the fact these are not usually well understood entities we recommend getting advice bfire using one and considering using a Unit Holders Agreement to tailor the entity rules to your situation.

Overall Considerations

We recommend selection of entities and the resulting agreements to govern these entites be based closely on your specific circumstances and be researched and recommended in close cooperation with your tax accountants. We are able to assist with this at Ascendia Accountants, or alternatively in conjunction with your existing tax accountants.