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Revealed: The five benefits of setting up an association agreement

by , 06 September 2013
An association agreement aims to regulate the internal affairs of a close corporation (CC). One of the benefits of this agreement is that it's binding on all present and new members of the CC. But there are more benefits to an association agreement. Read on to find out what they are...

If you're member of a CC, you stand in a fiduciary relationship to the corporation. A fiduciary is a legal or ethical relationship of trust between two or more parties.

This means that because the CC is a separate legal entity, you must:

  • Act honestly and in good faith
  • Exercise your power to manage or represent the CC in the interest and for the benefit of the CC
  • Not act without, or exceed the power that you've been granted.

This is where an association agreement comes in.

To prevent any breach or problems arising as a result of negligence with regard to fiduciary duty, it's crucial that every CC uses an association agreement, says the Practical Tax Loose Leaf Service.

Here how an association agreement will benefit your CC

Benefit#1: The agreement is a guide on how to calculate a member's interest if or when the member dies. It also includes the value you must add to his or her estate.

Benefit#2: The agreement is a guide to calculate a member's interest for the change in members, such as when a new member joins the CC. It ensures your new members don't unfairly profit from the fruits of your labour.

Benefit#3: The agreement clearly identifies the duties, responsibilities and inputs of each member. If the CC has seven members, all seven can't be responsible for HR, finance, sales, warehouse management and other management roles. The agreement helps to prevent this chaos.

Benefit#4: An association agreement clearly identifies the loan terms for each member that makes loans to the CC.

Most new businesses need the initial start-up capital and cash flow and the members usually provide this.

Benefit#5: The agreement can call for life insurance (key-man insurance) against each member. This'll assist in cash flow and replacement costs if or when one of the members dies.

Also, a policy of this kind could allow for the payment of a member's interest to the deceased member's estate without delay or severe hindrance to your CC's cash flow.

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