Basic Rules for Protecting a Business

Basic Rules for

Protecting a Business

Don’t know where to start?
Here are some basic guidelines to follow when looking to protect your small business.


Always Protect the Costs-to-Stay-Open-for-Business first

The costs to stay open for business are the 'fixed overhead costs' and are often contractual in nature. Make sure you have 12 months of fixed-cost funding on hand, just in case, so you can have a business to come back to after you recover from an unexpected sickness or accident, or so you can have an active business to sell as an ongoing concern if you have not yet recovered after 12 months. Insuring the Fixed Overhead Costs reduces the risk to a small business.


Always Protect the Key Revenue Maker

The biggest risk to a small business is usually its overreliance on its Owner. Whether the Business Owner, a Specialist Expert or a Key Person, most businesses derive the bulk of their revenue from a few key individuals.

Insuring the Key Person to the business protects a business from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner, or skilled employee through sickness, injury or even death.


Always Protect the Business Debts

Businesses use debt to start-up or to grow. Whether these funds are supplied by the owner (Directors Loan Account) an external funder (using 1st mortgage security over property assets) or investors (usually a combination of mortgages and Director Personal Guarantees), nothing stops a business like an unexpected and immediate call-up of debts, well before they're expected to be repaid. Nothing stresses a business and its suppliers as having difficulty meeting its loan and debt obligations. Insuring the Business Debts & Liabilities from sickness, accident, or even death of the Owner, Business Partner or Key Person reduces the risk to a small business.


Always Protect the Business Ownership

Owning a business in Partnership with another means all the Partners need to protect their portion (equity investment) in the business to make sure the future control of the business stays with them. A forced change in ownership, due to one or more of the partners unexpectedly suffering a motor vehicle accident, ill health, or even death and then selling their shares, could destabilise the business ownership and risk its future. Protecting business ownership with a Partnership Agreement, Company Powers of Attorney and Insuring the Business Ownership, help reduce the risk to a small business.


Find a Risk Adviser specialising in working with Small Business Owners and their Families

Protecting yourself and your family from the risk of running a business is key to business and family harmony (and peace of mind). This is because small businesses and the families that support them have different risks, liabilities, and time constraints than average employee-based families. The team at Sapience Financial specialise in working with small business owners and their families, Sole Traders, Partnerships and Multi-owner business, and their Companies to help them protect themselves from their business.

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What is a Shareholders Agreement?

A shareholders agreement sets out the rights and obligations of the shareholders of a company.  It's a commercial way of agreeing on rules and procedures for governance in advance and helps avoid future disputes and ambiguities.

Who should consider it?

While not required by law, a shareholders' agreement is essential for companies if they have, or will have, more than one shareholder. Even if your company is not planning to raise capital immediately, it is important that a shareholders agreement be implemented as soon as it appears that there may be more than one shareholder.

Whether your company will benefit from a Shareholders’ Agreement will depend on many factors, including where your company is at in the corporate lifecycle.

For example, companies with a Sole shareholder that sit in the start-up phase are unlikely to see the benefit of implementing a shareholders’ agreement. However, if you’re in the growth phase, and looking to bring external investors on board, it would be the opportune moment to implement a shareholders’ agreement as it would return real value. But before we go too far, what is a shareholders’ agreement, and why do you need one?

When to put a Shareholders Agreement in place?

Put a Shareholders Agreement in place when you first incorporate the company and all parties are keen to work together. Later on, circumstances may change, and resentment may build between shareholders as the problem of life and business may cause some shareholders to become less than supportive of the business direction and management approach.

It is, however, never too late to build a Shareholders Agreement.

How is a Shareholders Agreement different from the Company Constitution?

A shareholders’ agreement allows for clarity around the rights, responsibilities, and processes available and expected of members and the board.

  • A Constitution contains information about the day-to-day, administrative matters of the company, including share class permissions, whether the replaceable rules under the Corporations Act apply, and whether the company can coordinate resolutions by way of circular resolution, as opposed to having to meet and resolve decisions in person.
  • Whereas a shareholders’ agreement governs the relationship between shareholders, the board of directors, and the company. It also outlines processes and mechanisms available to shareholders and Directors. This includes processes relating to the power to replace directors, the transfer of shares to third parties, mergers and acquisitions, and shareholder disputes.

While there may be some overlap in the general topics covered in the constitution and shareholders’ agreement, the shareholders’ agreement is much more detailed in outlining the specific processes, mechanisms, and relationships of the members of a company.

Plan today to avoid unnecessary disputes tomorrow

Regardless of whether members are friends and or family, a well-drafted shareholders’ agreement can avoid potentially costly disputes by ensuring all shareholders are on the same page, are aware of their rights and obligations, and sets out processes and procedures for dispute resolution.

Common clauses addressed in Shareholders’ Agreements

The specific clauses and processes drafted into a shareholders’ agreement are specific to each company and its unique circumstances. Thus, it is beneficial that the clauses are drafted by an experienced corporate legal advisor to ensure that all of the clauses appropriately reflect the requirements of each of its members, including minority shareholders while remaining compliant with ASIC and the Corporations Act.

Eight benefits of a Shareholders Agreement

A tailored Shareholders Agreement;

  1. Outlines the basis for important decision-making and restricts the power of directors where necessary
  2. Protects the owners, directors and the company against the actions of others
  3. Minimises business disputes between owners – makes it clear how decisions are made and provides dispute resolution
  4. Assists in getting bank finance – shows stability to potential partners
  5. Prevents changes in one shareholder’s personal circumstances from affecting the company or other shareholders
  6. Protects the rights of minority shareholders and the investment value of their shareholding
  7. Lists and sets out procedures if a shareholder decides to sell their shares

The Shareholders Agreement need to address:

  1. Share splits and types of share
  2. Voting rights of shareholders
  3. Actions that require shareholder consent
  4. Shareholders when they are also company employees
  5. Pre-emptive rights for the transfer of shares
  6. New shares
  7. Share valuation
  8. Shareholder liability when the company is in debt
  9. Share disposal
  10. Confidentiality

How we can help

A Shareholders Agreement is an important part of protecting your business and your family, from the business.

  • We can supply this legal document.

Contact us for a confidential chat about your needs.

Related: Key Legal Documents for Business Owners

Related: Featured Business Articles

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