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About Partners and Shareholders

Why Have a Partnership or Shareholders' Agreement?

What Kind of Clauses Should I Consider?

Does Each Party Need a Separate Lawyer?

About Partners and Shareholders

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.

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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.

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Since each situation is unique, a lawyer should write the contract. It may contain many different types of clauses, including:

• Who manages the business and how much power they have
• Restrictive covenants to prevent owners from competing with the business, even after they leave
• Capital contribution and distribution of costs and profits
• Restrictions on transferring ownership interests
• Restrictions on admitting new owners
• Remedies on default. What happens if someone breaks the contract?
• Shotgun clause or termination-of-partnership clause for winding up the business, sometimes forcing a buy-out of one or more ownership interests.
• Sale on death. If another owner dies, you may not want to do business with her heirs. Set out a formula to put a fair value on each party’s interest.
• Disability. What happens if an owner gets injured, particularly if he works in the business? It's important to balance the interests of all the parties.
• Life insurance issues. Businesses often purchase life insurance in case a key owner suddenly passes away.

For a more detailed explanation of these clauses, see the article " Putting Promises on Paper."

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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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