26th September 2016
Know Your Business Partners’ Structure and Financial Affairs
Going into business is often an exciting, daunting and liberating time, however whilst there are many things you need to setup, understand, get your head around and research, its often the most important things you might forget or not even realise that you need to consider.
One of those considerations that often gets overlooked is when going into business with a business partner and assume their partner’s business structure or financial affairs is none of their business. In fact, it could be said the opposite to that is true. Your business partner’s financial affairs and their legal structure could have a significant impact on your own financial affairs. We’ll often setup trading entities for clients and when asking the question of how their business partner will be holding the interest in the trading entity we’re told ‘I’m not too sure, it’s up to them and they’ve got their own accountant advising them on that’. That kind of aloof approach can get you in hot water.
An example of that is how you and your business partner setup your trading legal structure when starting a new business. Let’s suppose you setup a company as your trading entity, you hold your shares via a family trust but your business partner holds their shares in their individual name. Several years down the track and suddenly your business partner has run into financial trouble and has been forced to file for bankruptcy. If this were to happen, then you will find yourself with a new business partner – the trustee in bankruptcy! The trustee might decide to hold onto the shares or they might decide to go to market to sell the shares (unless of course you had the cash to buy out their share). Nevertheless, this is probably a scenario you rather avoid and had your business partner also purchased their shares via a family trust this scenario would have been negated.
We had a similar scenario with a client recently (again, our client held their shares via a family trust but their business partner held their shares individually) and when they started the business both parties lent considerable money to the business as start-up loans. Several years down the track and the business partner run into financial trouble and was forced to declare bankruptcy. The trustee in bankruptcy sought to seek repayment of the loan which would have proved a major cash flow strain on the business. Fortunately, our client had earlier put a Fixed and Floating Charge in place over the businesses assets as their loan was considerably higher and the trustee in bankruptcy decided not to take the case any further once they were provided with that information.
These are just a couple of examples that reiterate when going into business with partners you need to make their business your business.
This article is general in nature and should not be relied upon in making an investment decision. We strongly recommend you seek financial advice prior to making any investment decisions.