You and the Law

Say you and a friend are thinking about going into business together as partners. One of the most important things you can do for your business relationship is to have a written partnership agreement prepared before too much time, money or energy is spent on the project.

A partnership agreement determines how the business will be run while everyone is alive and getting along with each other. But it also deals with what happens if a partner dies or wants to leave the business because of health or other reasons.

When you form your partnership is the time to decide how you and your future business partner really think about issues and what you’ll do if you disagree. If you’re too far apart on certain issues, you may in fact decide you don’t want to go into business with him.

A good partnership agreement will address the following points:

• How much capital will you each contribute for the space, equipment, supplies and future expenses? What happens if a partner fails to contribute their share? 

• What will be the responsibilities of each partner? How much time is each partner expected to devote to the business?  

• How will you split the profits and losses? Bear in mind that if you decide internally to split the losses unequally, creditors can still come after either of you for the whole debt or liability.

• Who’ll manage the business? Will the partners be paid a salary, and if so, how much?  

• How will decisions be made? By unanimous approval? Or will one partner’s decision be final?

• What are the plans for bringing in new partners?

• What happens if one of you dies or becomes disabled?

• What happens if one of the partners wants out of the business and the other doesn’t? Will one partner buy the other out and carry on the business alone?

• If one partner leaves the business, what limits will there be on his or her ability to compete with the remaining partner?

• How will you value who gets what when the partnership is dissolved?

If these issues are sorted out to begin with, you and your partner should be able to fix any disputes amicably. However, sometimes partners simply cannot resolve differences and a stalemate is reached. Your partnership agreement might therefore contain a “shotgun clause” – where one partner can offer to buy out the other for a certain price, and the other partner must accept that offer or buy the offering partner’s interest in the business for the same price.

If you don’t have a written partnership agreement, the provincial Partnership Act governs how you must run your partnership, and it applies rules you might not choose. For example, the Act says all partners share equally in the profits whether or not one partner puts more into the business than the other (unless you make a different agreement).

But your lawyer can advise you about the issues noted above and suggest ways of addressing them. He can also explain the pros and cons of using various other business structures, such as a company or limited partnership. Your lawyer can then develop a properly drafted agreement for you, which creates a roadmap to help you avoid any future misunderstandings.

 

 

This column has been written with the assistance of ANDREW LAU. The column provides information only and must not be relied on for legal advice. Please contact ANDREW LAU at (604) 681-3833 for legal advice concerning your particular case.

 

Lawyer Janice Mucalov, author of this article, writes about legal affairs for several publications. “You and the Law” is a registered trade-mark. © Janice Mucalov.

 

 

ANDREW LAU LAW CORPORATION

 

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Vancouver, BC V6C 3E8

 

Phone: 604.681.3833

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