Business Law Advice Service
Case Study
WE’LL SORT THAT OUT LATER…
WE’LL SORT THAT OUT LATER…
Joe’s Confidential Document Services is a firm that specialises in the confidential destruction of sensitive documents for Accountants, Banks and Law Firms in and around Manchester.
It was started by Joe and his eldest son, Jim several years ago.
About 2 years ago, Joe took on an old friend Dave as a co-partner. He didn’t see any reason to sort out a formal partnership agreement to govern the conduct of the firm’s business as he and his son had voting control of any decisions and all parties had agreed to a one-third share of profit each from the date Dave joined.
Six months ago, Dave was later arrested and imprisoned for fraud related to his previous business dealings. It was splashed all over the local press and did significant damage to the firm’s reputation.
From prison Dave wrote in claiming an immediate pay-out of one-third of the value of the business (including goodwill). Joe and Jim were astonished to learn that he was entitled to what he had asked for. They managed to negotiate a small discount and then raised the funds to pay Dave out.
With the credit crunch hitting them over the past few months they have now reached their overdraft limit and it will be touch and go as to whether they can survive. If they go under, as they are a partnership, all their personal assets are on the line.
WHAT THEY SHOULD HAVE DONE
They should have taken advice on the best structure of the business when Dave came on board and then made sure that a proper partnership agreement (or shareholder agreement if the business was to be converted into a limited company) was drawn up.
Such an agreement would have dealt with the expulsion of a partner, the valuation of a departing partner’s share, and the timescales for paying out any monies due. It is also very likely that only a nominal payment would have needed to be made to Dave in the circumstances outlined above.
If the business model had involved conversion to a limited company or limited liability partnership, that would also have provided some future protection against any creditors who did not have the benefit of personal guarantees. On conversion to a limited company, they might also have taken the opportunity to convert the value of their partnership shares into directors’ loans that could be drawn down tax free over the next few years and also reduce the aggregate value of the company in the case of a claim by Dave.
AT WHAT COST?
The legal paperwork to convert the business model and draft an appropriate partnership/shareholder agreement would probably have cost in the region of £2500. A partnership agreement on its own would have cost in the region of £1000.
It was started by Joe and his eldest son, Jim several years ago.
About 2 years ago, Joe took on an old friend Dave as a co-partner. He didn’t see any reason to sort out a formal partnership agreement to govern the conduct of the firm’s business as he and his son had voting control of any decisions and all parties had agreed to a one-third share of profit each from the date Dave joined.
Six months ago, Dave was later arrested and imprisoned for fraud related to his previous business dealings. It was splashed all over the local press and did significant damage to the firm’s reputation.
From prison Dave wrote in claiming an immediate pay-out of one-third of the value of the business (including goodwill). Joe and Jim were astonished to learn that he was entitled to what he had asked for. They managed to negotiate a small discount and then raised the funds to pay Dave out.
With the credit crunch hitting them over the past few months they have now reached their overdraft limit and it will be touch and go as to whether they can survive. If they go under, as they are a partnership, all their personal assets are on the line.
WHAT THEY SHOULD HAVE DONE
They should have taken advice on the best structure of the business when Dave came on board and then made sure that a proper partnership agreement (or shareholder agreement if the business was to be converted into a limited company) was drawn up.
Such an agreement would have dealt with the expulsion of a partner, the valuation of a departing partner’s share, and the timescales for paying out any monies due. It is also very likely that only a nominal payment would have needed to be made to Dave in the circumstances outlined above.
If the business model had involved conversion to a limited company or limited liability partnership, that would also have provided some future protection against any creditors who did not have the benefit of personal guarantees. On conversion to a limited company, they might also have taken the opportunity to convert the value of their partnership shares into directors’ loans that could be drawn down tax free over the next few years and also reduce the aggregate value of the company in the case of a claim by Dave.
AT WHAT COST?
The legal paperwork to convert the business model and draft an appropriate partnership/shareholder agreement would probably have cost in the region of £2500. A partnership agreement on its own would have cost in the region of £1000.
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