Partners or Shareholders – 3 key differences you need to know

Ownership of pharmacy businesses can be achieved via various ownership structures.? One of the first decisions are prospective purchaser must make is what structure they will use to own the business.? There are pros and cons of every structure however all too often, there is confusion about the partnership and shareholding structures.? These structures are very different and it is important they are clearly understood before embarking on your next ownership journey.

What are the structures?

A partnership is when two or more individuals or companies come together with a common goal and with a view of operating a business for profit.? It is the partnership (being the combination of partners – be it individuals or companies) that owns the business, and the partners share the profits, liabilities and management according to their partnership interest and partnership agreement.? Although a partnership agreement is not mandatory, it is strongly recommended.

On the other hand, a shareholding arrangement is a structure where individuals own shares in a company, giving them an ownership interest and rights within the company.? A shareholding arrangement should be governed by a shareholders agreement.? Where a shareholding arrangement exists, it is the company which owns the asset (ie. the pharmacy business), not the individual shareholders.

Key Differences

Once you understand the two structures, it’s important to consider some of the key differences between them.? Three key differences which you need to know are:

1.????? Exposure to Liability

• In most partnership structures, partners have unlimited liability for the debts and obligations of the business. This means personal assets of the partners can be at risk. ?Unlimited liability exists irrespective of what percentage interest a partner holds in the partnership as a whole.? For example, a minority partner still has unlimited liability.
• Shareholders have limited liability.? They are only liable up to the amount they invested in the shares in the company.? Further, in most circumstances, shareholders are not personally liable for the actions of the company.

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2.????? Profit Sharing and Distribution

• In a partnership, profits and losses are shared amongst the partners, typically in proportion to their interest in the business, which should be set out in the partnership agreement.? The partnership itself does not usually retain any profits. ?
• Shareholders receive profits via dividends which are distributed based on the number of shares the individual holds in the company.? Dividends are not guaranteed.

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3.????? Ease of Continuity and Transferability

• Partnerships often face challenges with continuity, especially where there is a low number of partners.? In some circumstances, the challenges result in the partnership being dissolved or restructured, which often results in the sale of the business as a whole. Further, the sale of a partnership interest in a pharmacy business results in a new PBS approval number.? This can cause disruption to both the business and its employees.
• Shares in a company are more easily transferable.? Shares can often be sold or transferred without affecting the existence or operation of the company.? For pharmacy businesses, a change in shareholding also does not impact on the existing PBS approval number the company holds in respect of the pharmacy business.

If you have any questions regarding ownership structures or are ready to set up your new ownership structure or ownership agreement, please contact Vitality Law Australia on (07) 2140 0522 or [email protected]

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Sarah Stoddart is the founder and director of Vitality Law Australia, an award winning commercial law firm servicing pharmacy businesses and healthcare professionals across Australia.? For further information, email [email protected] or visit www.vitalitylawaustralia.com