When two or more people are in business together, whether in partnership or in a limited company, the terms on which they own and run the business should be set out in a partnership or shareholders’ agreement. In far too many cases, the lack of an agreement causes serious problems for the parties (or their nearest and dearest) when something goes wrong.

Most business partners trust each other to behave reasonably, but the fact has to be faced that partners do sometimes fall out. When that happens, having a legal contract is invaluable. It provides guidance on each of the parties’ rights and duties, and prevents the dispute resulting in protracted, expensive and often very bitter litigation. As in a personal partnership, when a business partnership breaks up, the dispute can easily become acrimonious.

Apart from the partners falling out, problems can arise if circumstances change, for example if one of them dies, falls ill, has an accident, or even experiences a mid-life crisis.

There are some major differences between partnership agreements and shareholders’ agreements, and the terminology is significantly different, but the terms such agreements have in common typically include:

• who owns the business and in what proportions;

• the partners’ profit shares;

• taking money out of the business;

• the admission of new partners (or directors/shareholders);

• what happens if someone falls ill or has an accident;

• what happens if someone wants to leave the business;

• what happens to the share of a partner who dies.

The lack of a partnership or shareholders’ agreement should be a matter of serious concern to anyone involved in a business with other people. When people get together to start a new business, money is understandably tight, and so the preparation of one of these documents is often postponed.

After a few years, when the business is reasonably successful, they may never have gotten round to formalising the arrangement between them. After all, it has all worked well enough so far… but the reality is that the business is now a valuable asset. As time goes by, people and their expectations change, as does the nature of the business and the economic circumstances in which it operates. Their lack of an agreement leaves them without solutions to the problems that can arise.