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Always a cobbler worst shod – how well organised is your firm?

When professional advisers fall out with each other, shortcomings in the internal governance of their business are exposed.

All too often professional advisers lavish care and attention on their clients, helping them to achieve their commercial objectives, but neglect to ensure that their own affairs are properly in order. The consequence? When they fall out with each other, shortcomings in the internal governance of their business are exposed and problems multiply. However, many of those can be avoided with just a little prior planning.

Many professional business owners simply do not appreciate that, in the absence of a clear (preferably written) agreement regulating their relationship with each other, they are likely to be subject to a default regime. Rules and obligations are often imposed on them as a matter of law, depending on the kind of vehicle they use to run their business. Popular business vehicles include partnerships, Limited Liability Partnerships (“LLPs”) and limited companies.

Partnerships

Whenever two or more individuals go into business together, other than through some kind of corporate entity, there is a strong likelihood that they will be deemed to have formed a partnership; no paperwork is required. That means that their relationship is subject to the provisions of the Partnership Act 1890, although the operation of that Act can be excluded by agreement. Absent such agreement the consequences can be unforeseen and unwanted and can include:

  • Each partner having unlimited liability for the acts of the others
  • A lack of clarity regarding ownership of the assets of the partnership – and a presumption that they should be shared equally if the partnership comes to an end, however they were contributed
  • No satisfactory means of breaking a deadlock
  • An automatic right for any partners to dissolve the partnership without notice

LLPs

Although called “partnerships”, LLPs are actually corporate entities with a separate legal identity – like companies. LLPs have “members” rather than “partners”, although the terms are often used interchangeably. In the absence of agreement to the contrary, the relationship between the members is governed by the default provisions set out in the Limited Liability Partnerships Regulations 2001. These include:

  • All members having an entitlement to share equally in the capital and profits of the LLP
  • Every member having the right to take part in the management of the LLP
  • Decisions in relation to “everyday” matters being decided by majority
  • No right to expel a member

Limited companies

The rules governing the running of limited companies can largely be found in the Companies Acts. Suffice to say that the default provisions for corporate governance are very unlikely to represent a satisfactory landscape for those in business and it is always prudent to enter into additional documentation to regulate the relationship between shareholders.

What can be done?

Despite the chaos that can result, a surprising number of businesses have an out of date partnership or shareholders’ agreement, or none at all. Sometimes the reason for this is simply that no one thought that one was necessary. This is to be avoided:

  1. Don’t rely on default provisions to determine how your firm is run
  2. If you are starting out with a new business decide, at the outset, how you want the business to work. Is one partner contributing more capital? Will another be more proactive in getting work through the door?
  3. Put a partnership/shareholder agreement in place before you start the new business – certainly before you think that you need it. Get professional assistance with this; it will be worth it in the long run.
  4. Review your agreement every few years to make sure that it meets the continuing needs of your business
  5. Consider whether you want your agreement to provide for alternatives to court action – perhaps some form of conciliation procedure or to provide for arbitration in private rather than a hearing in public

This article was first published in an edition of the ICAEW’s “Practicewire News”.

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