Want to start a business? Chances are, you're looking for someone to share the responsibilities and expenses. Very useful. In a restaurant, for example, one owner may cook, another may serve patrons, and a third owner may handle the supplies and bookkeeping.
Perhaps you've found someone. The question now is, do you want to be partners or shareholders in a company? Although in a small, private business both types of co-ownership look the same, there are several differences, including tax and personal liability consequences.
In law, a company is considered a separate person, and its owners are "shielded" from its debts as well as each other's. Of course, creditors know that and usually get small business owners to co-sign any loans. Partners, meanwhile, are generally responsible for each other's debts (with some exceptions).
Laws such as BC’s Partnership Act and Company Act, which regulate among other areas the relationship between owners, leave many questions unanswered. That's where a written contract is useful.
Why Have a Partnership or Shareholders' Agreement?
As co-owners starting a business, you need to define in advance your business relationship and the promises you’ve made to each other. A business partnership is like a marriage. While no one begins expecting to fail, sometimes disputes come up. A business break up can become as emotional and bitter as a divorce.
A written shareholders’ agreement or
partnership agreement clarifies the rights and
obligations of each party. It describes what happens
during the operation of the business, and in the event
of a break up.
What Kind of Clauses Should I Consider?
Since each situation is unique, a lawyer should write the contract. It may contain many different types of clauses, including:
Does Each Party Need a Separate Lawyer?
Before signing anything, each party should get an
independent lawyer to review and explain the partnership
or shareholders’ agreement. That’s because each
party has different interests, and may understand the
terms differently. It also makes the agreement less
likely to be challenged in court by a party claiming she
didn't know what she was signing.
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This page last updated: September 23, 1999
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