You and your best friend have a great idea on the back of which you decide to start a business. You think this business cannot go wrong at all because you have a trusting relationship. 6 months later your best friend gets distracted with another project and you feel isn’t being dedicated enough to your business. You disagree with what each of you thought was the initial agreement. The truth of the matter is, there was no agreement. If you already have, or are planning to embark on a business that could set you up for life with one or more partners, is there a sacred checklist to bear in mind? The good news is that Crimson Legal have created one.
1. Always have a written agreement
Whilst verbal agreements can be arguably put forward in the presence of competent witnesses it cannot be said with certainty in this digital age that this may be accepted by a court of law which is why having a well drafted, written agreement with clear English or Arabic is a mandatory pre-requisite to any good foundation. As business partners, you would ideally sign a co-founders agreement or a shareholders agreement and this should detail your rights, obligations, remedies and exit strategy. Private commercial agreements do not need to be registered with the public notary in order to be valid to the extent the parties have capacity and competence and the object of the agreement is legal. When you register a company in the UAE i.e. get a license to do business, you are issued with a license, memorandum and/or articles of association and share certificates (depending the regulator these agreements may differ in title). Memorandum of association usually sets out the objects of the business whilst articles of association are extracts based on the UAE companies law that sets out how the company is to be operated in compliance with the law – this is not an agreement between the partners. Also, never rely on your friendly PRO or a company agent to create an agreement for you because they are not professionally licensed to do so.
2. Create a business plan and strategy
It obvious that your business should be licensed before you transact with customers, which is why it is not part of this checklist. Having a plan and strategy is critical to every business and a business that does not know its goal posts or how it is going to get there is most definitely going to face roadblocks with scaling. What is even worse is that the business may never grow and stay at the same size with no objectives. Believe it or not, having with a good plan and strategy for your business can turn a little hobby into a global conglomerate. How else did giant businesses come into existence?
3. Demarcate roles and responsibilities
You know the age old adage ‘Too Many Cooks Spoil The Soup’, applies to all activities where there are more than one person trying to do something. Unless you allocate, designate, define and separate your roles, contributions and responsibilities, you are writing a recipe for a disaster. No 2 humans in the world can envision something the same way for a variety of biological, cultural, emotional, psychological and other reasons which is why having separation of roles with a clear plan and strategy gives everybody something to do and everyone knows the objectives that need to be achieved. Successful businesses do not run based on personalities and control but run based on good culture, processes, policy and delegation. Having decisions documented in shareholder resolutions or recording minutes of meetings also helps with managing your business in a legitimate manner.
4. Manage conflicts of interest
If you are best friends, siblings, relatives, spouses getting into businesses together be forewarned that this is a conflict of interest in all cases and emotions will run high at very many times. In such cases, it is critical to follow simple steps to avoid conflicts like not discussing business matters within the confines of your home or at social events or in front of other family members or friends; maintain strict confidentiality of all matters that you discuss with your business partners and do not share these with any third party whoever they may be; do not employ, hire, allocate tasks to other friends or family members because this will create prejudice; make important decisions together if these have not been allocated to you for your own decision making.
5. Clear channels of communication
If you are allocated a task as a partner, deliver on it. Do not procrastinate and do not delegate it to a third party without the consent of your partners. Remember as partners it is your responsibility to act in the best interests of the business, not either of yourselves. Relay the status of your responsibilities and report into the Board if the business has one. As a partner you can never act entitled or feel royal. The most successful businesses have good culture that arises out of clear communication and processes.
6. Restrictive Covenants
Non-compete, Non-solicitation, Non-circumvention are some of the main restrictive covenants that every business partner should actively consider applying into their co-founders agreement or shareholder agreement. In case of a falling out, this will prevent the other partner running off in the wind with the same idea or implementing it ‘differently with a similarity’.
7. Set up a business bank account
When your business starts making you money, do not indulge in frivolous expenditure and blow up the bank account. Your business revenue is not a partner’s bonus pool, or a kitty for indulgences or worse yet to cover individual indebtedness. The business revenue should cover your business overheads, be allocated to reserve and contingency funds, and cover at least 6 months – 12 months in the future of overheads, to start with. Any excess monies should only be distributed at the end of a calendar year as dividends to partners and not frequently although there are businesses that are known to distribute dividends bi-annually. Remember that every expenditure needs to be in the best interests of the business and any withdrawal should be legally withdrawn and allocated to partners.
8. Record all financial transactions in a software
Manual recording or avoiding maintaining records even if you are on a freelancer license or single owner business, is absolutely not acceptable. Remember the Federal Tax Authority has the right to audit any licensed business in UAE regardless of whether they are registered with the FTA or not and any indiscrepancies can be severely penalized.
9. Know the laws that apply to you
Acting within the remit of your license is an infallible requirement. If you are on a Free Zone license then you should understand the implications of it and act accordingly and all partners should be aligned. Remember that it only takes one error or act of negligence to be penalized or worse still for the business to run into losses which is why all partners need to act within the license activities and not outside of these. Consulting with a legal advisor at the outset and knowing the laws that apply to you, risks you should be mindful of and how best to manage partner activities that you may believe fall within a gray zone.
10. Operate the business like a business
Use professional email accounts, manage and maintain professional social media accounts, create a reliable brand for your business, refer to yourself as a business and not to as an individual. Any correspondence between partners should always be through professional email addresses, written in a professional manner and ideally not through private email addresses, regardless of the level of involvement of a partner. Allowing for correspondence through personal emails, thins the veil of privacy that can be crucial in partner disagreements or disputes.
This article is written by Bianca Gracias, Managing Partner at Crimson Legal who has been a lawyer in UAE for over 18 years advising business owners on avoiding glaring risks and becoming successful through correctly complying with laws.