Why you start with trust, but grow with contracts?

I was genuinely impressed when they answered affirmatively, because in reality, most business owners don’t.  

The truth is that most founders and partners neglect internal documentation until they realise they should have one, by which time it’s often too late. More often than not, the realisation occurs when the business grows and deals get larger, when disputes arise, during a merger and acquisition or when there is a plan for a public listing.

 It is only then that they will realise that they should have had one even before they start their business. 

A Well-drafted Contract

The common start-up journey of a company or partnership usually looks like this:

1. a few partners having the same business ideas, 
2. setting up an office, 
3. registering the entity with the Companies Commission of Malaysia (SSM), 
4. opening a business bank account 

Then, diving straight into operations, contracts, and compliance takes a backseat.

However, rushing into operations immediately — straight into money-earning mode — will in many cases cause trouble later, which usually surfaces down the line, especially when success or disagreements enter the picture. Business owners often neglect the most crucial element of their business: protection. Protection of a company always starts with compliance and a well-drafted contract, which we call putting it down in “black and white”, and lays out the proper legal groundwork.

Now, what does compliance mean, and what should the contract capture?

The fundamentals include:

1. Obtaining the business license;
2. Confirmation of the parties involved;
3. The nature of the business;
4. Allocation of the capital contribution;
5. Responsibilities and roles of the shareholders;
6. Profit-sharing arrangements.

These fundamentals are crucial to form the backbone of any business agreement, which shall be discussed early on. But beyond the basics, the clauses that are most often overlooked, yet most critical in the company, which include:

1. Exit plan: What happens when a shareholder wants out?
2. Drag-along and tag-along rights: How do you protect minority and majority shareholders in a sale?
3. Reserved matters: What decisions require unanimous or special approval?

These provisions allow founders and shareholders to define how the company is governed, ensuring that decision-making, control, and succession align with their mutual expectations and business model both now and in the future. These are essential for long-term business health and governance.

The Termination Clause

From experience, the termination clause is often the most sensitive and contentious. No one starts a venture intending to dissolve it, but the reality is cruel; circumstances change. There will be differences in vision, strategy, or personal goals that may eventually lead to a split. Nobody wants that, but it happens.

That is why it is vital to set out the termination process clearly, considering the following:

1. How will the shares be valued at the time of exit?
2. Who has the first right of refusal?
3. Are there pre-emption rights?
4. What is the timeline for completion?
5. What are the procedures to initiate termination?

Following that, another often forgotten but crucial consideration: What happens if one of the shareholders passes away? Who inherits the shares? The estate, a family member who might not know a thing about the company’s operations or the company itself. Planning for such scenarios ensures business continuity and prevents future disputes.

There will never be an end to the possibilities that may arise in a business, where the unexpected is the only constant. The least we can do is plan, prevent, and prepare for the worst, as prevention is always better than a cure. It is an old saying that will never expire. 

Your Business is Unique

All in all, there is no “one-size-fits-all” contract for a company. Every business is unique and has its own concerns —its structure, people, goals, risks, and dynamics — which is why it is always encouraged to address these matters early on, before any dispute or misunderstanding arises. A well-thought-out contract doesn’t just protect the business; it sets the foundation for clarity, lasting trust and growth. It is not just a legal document; it is part of the business strategy.

If you’re a business owner or founder, don’t wait until something goes wrong. Business runs on paper, not promises. Seek legal consultation early. You’ll thank yourself later. 

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Ellie Law of Daphne Leong and Ellie Law Chambers is building a new kind of law firm—one grounded in empathy, education, and everyday people.

The views expressed in this article are those of the author. The content is provided for informational purposes only and should not be taken as professional advice. Readers are encouraged to consult a qualified professional before making any decisions.