A lot of our clients are people who have existing businesses or who are setting up a new or startup business. One thing they often need is some kind of agreement between the owners of the business, which will be either a shareholders agreement or a partnership agreement. Quite often, however, our clients don’t know the difference between these two types of agreements. Do you?
Companies and Partnerships: the differences
If the business is incorporated, that is, operated through a company, the agreement should be a shareholders agreement between the shareholders, directors (who may be the same people) and the company. If the business is not operated through a company, then the agreement should probably be a partnership agreement.
A partnership is like a marriage. It is a relationship. When one of the partners dies or leaves, the partnership ends. A company is a legal entity. People can come and go, but as long as the company meets the minimum requirements set by the law (in Australia, at least one shareholder and one director), the company survives.
This is a simplification, of course. What did you expect from the legal system? We can say that a company also involves relationships, e.g. it has horizontal relationships between directors in the board, between shareholders as owners of the company, between the company and investors, and vertical relationships between the shareholders and directors. Also, the law can treat a partnership as an entity, e.g. in relation to tax. In some countries, a partnership can actually be a legal entity e.g. a LLP -( this doesn’t exist in Australia, where we are located, as yet). But, in very basic terms, a company is separate from its shareholders and directors, and a partnership is comprised of its partners.
Shareholders agreement vs partnership agreement: differences and similarities
In some respects, shareholder agreements and partnership agreements will do the same things. Each type of agreement will deal with what the parties put into their collaboration, and with what they get out of it, e.g. loans, capital contributions, drawings and dividend payments. Both types of agreements deal with governance issues: making decisions, veto powers, introducing new members, and so on. In addition, shareholders agreements will include extra material peculiar to a corporate set-up, e.g. the sale of shares, the creation of new shares, founders’ rights, and so on.
Whatever type of agreement is required, the important thing is that an agreement exists. Disputes among shareholders or partners can ruin a business. It is always a good idea to put into place an agreement that clearly defines the rights and obligations of the parties before any disputes happen.
If you require assistance with preparing a shareholders agreement or partnership agreement, please contact us.
[Photo credit: Digital handshake by EFF courtesy of Wikimedia Commons used here under a CC By 3.0 US licence. The author of this blog post is James Irving, a Perth commercial lawyer who prepares shareholders agreements and partnership agreements regularly for his clients.]