Co-ownership Agreements: What are they and why does your practice need one?

By Cutcher & Neale Accounting and Financial Services - October 19, 2021

When establishing a co-owned practice, it is an important step to put in place a shareholders’ or unitholders’ agreement (‘business co-ownership agreement’).

A business co-ownership agreement should contain a clear set of guidelines for operation of the business and the relationship of its co-owners across a range of key matters.

By having agreed processes and mechanisms in place for how things are to be done, the agreement can help to provide a smoother and clearer path through various matters that may arise. This can then allow the co-owners to maintain focus on operating the practice and potentially avoid expensive legal costs.

Generally, it is easier and quicker to settle on an agreed regime early in the practice journey when everyone is forward focused and wanting to work together. It gets harder to reach agreement if issues in the business or the relationship develop.

However, even if your practice has been up and running smoothly, significant change can happen quickly, unexpectedly and for reasons outside your control (or that of your business partner). Therefore, implementing a practice co-ownership agreement for an established business can help you better manage difficult situations as they arise.

The following are key matters that are often included in a co-ownership agreement:

  • Shareholders/unitholders – entry and exit.
  • Decisions that require unanimous resolutions as opposed to day-to-day decision making.
  • Capital contributions and funding – who should contribute and when or should the company or trust borrow.
  • Transfer of shares/units – how can shares or units be transferred to other members or third parties.
  • Consequences of death or permanent disability of shareholders/unitholders e.g. should shares be bought by other shareholders or unitholders, do you want that shareholder or unitholder's spouse or children to have a say in the governance of the business, should his or her estate and beneficiaries remain shareholders.
  • Determining sale price of shares or units upon transfer in different circumstances including death.
  • Remuneration of shareholders/unitholders including payment of dividends or drawings and treatment of loan accounts.
  • Roles/duties and responsibilities and productivity level of individual shareholders/unitholders and leave entitlements.
  • Restraint of trade upon transfer of shares or units.
  • Meetings – frequency and timing.
  • Sale of the business including drag-along/tag-along rights.
  • Dispute resolution - how will disagreements be resolved including use of mediation.

As well as the above, business relationship agreements often cover many other matters but are tailored to reflect the future plans of the practice, having regard to the age, financial position, expertise and personalities of the owners.

Therefore, it is recommended an experienced commercial lawyer is engaged to prepare the agreement.

If you need further information or advice specific to your circumstances, please get in touch with the team at Cutcher & Neale.

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