Binding Financial Agreements Explained

Understanding how binding financial agreements work is crucial when it comes to avoiding a potentially costly disaster, often with long lasting repercussions. 

If you’re unfamiliar with the term, binding financial agreements are essentially written contracts between two parties which outline how the parties would like to divide their financial resources in the event that their relationship comes to an end.

Needless to say, there are many different types of relationships to consider when it comes to money, and how best to navigate shared finances if the relationship in question faces a dissolution for any reason. As a means to protect mutual financial interest, this is often where binding financial agreements can be incredibly helpful - but what are they, and how do they work?

Three Common Types Of Binding Financial Agreements

To make a financial agreement to be legally binding and valid in all forms, it must be in writing and refer to the correct section of the legislation. In addition, the agreement must be signed by all parties after they have each received independent legal advice. A certificate from a legal practitioner such as a solicitor, will need to be attached to the binding financial agreement as evidence that the legal advice has been provided. 

In theory, a binding financial agreement can be applied to a wide variety of personal and working relationships that involve money. Whether or not you need one for a personal relationship will usually be influenced by any property or assets you already own, how you intend on dealing with future joint or individual liabilities, and if you expect to come into any large sums such as an inheritance.

Binding financial agreements in relationships usually come in one of three formats: 

Prenuptial Agreements - Before the parties marry and in contemplation of a marriage

Cohabitation Agreements - Parties are already living as a married or de facto couple and

Postnuptial Agreements - After the parties are already married, whether you intend to stay married, separate or divorce

BFA’s can be an incredibly useful tool for protecting assets of a financially stronger party involved in a relationship, so long as adequate provisions are made to the other party and the parties act fairly reasonably. However, it is also worth noting that binding financial agreements have the potential to be voided after a significant life event such as having children.

In the business world, binding financial agreements have a similar methodology when it comes to protecting income and assets. As an example, a shareholder’s agreement will regulate and govern the relationship between the owners of the shares in a company structure. In comparison, a unit holders’ agreement will likewise regulate and govern the relationship between the owners of the units in a unit trust. 

Although there is no legal requirement to have either a shareholder or unitholder agreement in place, it’s long been considered as an essential part of any business enterprise to avoid conflict, encourage good governance and ensure smooth operation and management. These types of binding financial agreements usually cover a broad range of subjects in the document, such as funding, structure, governance, associated commercial outcomes, and the duties and obligations of any stipulated unitholders or shareholders. 

Ultimately, you’ve no doubt worked extremely hard for your money and it’s important that you take steps to protect your amassed wealth when you enter a serious personal or business relationship. If understanding the paperwork involved in such a process goes beyond your sphere of knowledge, then it’s always a good idea to consult with the professionals. 

Sourcing Help With Managing Your Business Obligations 

Whether you’re starting a business, purchasing an existing one, or even reevaluating where your current enterprise stands - all require some form of financial know-how if you hope to successfully navigate your legal tax requirements as well as hitting your financial and business goals. 

However, if understanding the legalities that surround your business or finances isn’t your strong point, then it may be reassuring to know that you’re not alone. In fact, many businesses (big and small) enlist the services of an accountant in order to free up their time while knowing that their financial obligations are already taken care of by the professionals. 

Ultimately, the team at Muro believe that every business owner is an entrepreneur. However, accounting does not discriminate - finances break down barriers and are not territorial. If you would like to take a deeper look into your finances, please get in touch with us at Muro today to ensure that you’re on the right path for success.