Transactions with related parties: Overview, definition, and example
What are transactions with related parties?
Transactions with related parties happen when a business deals with people or companies that have a close connection to it. This could be a deal between a company and its owner, a contract with a family member, or an agreement with another business owned by the same people. These transactions aren’t illegal, but they do require extra transparency to ensure they’re fair and not used to hide financial risks or conflicts of interest.
Why are transactions with related parties important?
When businesses enter into deals with related parties, there’s a higher risk of biased decisions, unfair pricing, or hidden conflicts of interest. That’s why these transactions are closely monitored in financial reporting and corporate governance.
Regulators and investors want to ensure that these deals are made at fair market value and that they don’t harm other stakeholders, like minority shareholders or creditors. If not handled properly, related-party transactions can lead to legal issues, tax problems, or damage to a company’s reputation.
Understanding transactions with related parties through an example
Imagine you run a construction business and need office space. Instead of renting from an unrelated landlord, you decide to lease a building owned by your brother’s real estate company. This is a transaction with a related party because your family connection could influence the deal’s terms.
If the rent is at fair market value and properly disclosed in your company’s financial statements, this is generally fine. But if the rent is significantly lower than the going rate—or if the deal is hidden from investors or tax authorities—it could raise legal and ethical concerns.
An example of a transactions with related parties clause
Here’s an example of how a contract might address transactions with related parties:
“All transactions between the Company and any Related Party shall be conducted on an arm’s-length basis, ensuring fair market value and terms comparable to those available to unrelated third parties. The Company shall disclose all such transactions in accordance with applicable financial reporting and regulatory requirements.”
Conclusion
Transactions with related parties aren’t necessarily bad, but they require careful handling to avoid conflicts of interest and ensure fairness. By following transparency rules and making sure deals are done at market rates, businesses can avoid legal trouble and maintain trust with investors, partners, and regulators.
If your business engages in related-party transactions, make sure they’re properly documented and disclosed—because in business, fairness and transparency go a long way.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.