Thinking of going into business with someone else?
Read this first
By Alan Direnfeld
Barrister and Solicitor
Do you know the difference between co-owning shares in a corporation and entering into a partnership arrangement? Which option leaves you jointly and severally liable for all partnership debts. And what happens when a relationship ends?
Get the answers by reading the following 11-point primer on business partnerships, prepared by top Toronto business lawyer Alan Direnfeld.
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1. Corporations versus partnerships
In the public eye, corporations are often viewed in a more favourable light than partnerships. Incorporating is often viewed to express a commitment to a longer term existence. In theory, corporations have a perpetual existence while partnerships die with the death of a partner.
2. Plan for the termination of the relationship
Agree in advance on the path to a fair and reasonable separation of rights and obligations. Sooner or later, every relationship comes to an end. Termination may result from the end of the business venture, divergent views and personal perspectives, the retirement, incapacity or death of a partner.
3. Plan for the disposition of the business as a going concern
Large or small, each business will follow a path that will include highs and lows. Learn to spot when the most value in your business comes from its disposition.
4. Shareholder and partner liability
Shareholders may be able to bind the corporation, but generally speaking may not bind co-shareholders. Partners, on the other hand, may bind their partners in a variety of circumstances. The liability of a partner is 100% while the liability of a shareholder may be limited to his/her investment or guarantees. Corporate officers and directors have increased liabilities but remain limited relative to those of a partner.
There is a greater ability to separate ownership from management through a corporation.
6. Forming a partnership is a little like getting married
First you need to be introduced, then you need to date and, when you become comfortable with your partner, you get engaged and plan your marriage. Too many people jump into partnerships with people they hardly know.
You need to ensure that your business philosophies are aligned and that you can both deliver on your word... this involves morals, commitment, time, skills and money. These are not issues that you work out over time or that resolve themselves. These are issues that need to be addressed up front. And you can test the waters with smaller dealings and "one offs". Better to avoid mysteries.
7. Partnership debts
A true partnership (not to be confused with co-owning a corporation) leaves each partner jointly and severally liable for all partnership debts. This means that an insolvent partner can leave the moneyed partner with a home and other personal assets exposed. Partners with no skin in the game (money) have nothing to lose. This leaves open the prospect of them more easily and willingly walking away leaving the moneyed partner with all of the issues to resolve.
8. Partnership interests are earned
It does not often work out well when one partner is gifted his/her interest in the venture/business in exchange for a promise of future performance. Too often, the funding partner who has incurred the real risk and continues to have exposure, ends up buying back the interest of the non-performing partner.
9. Do not draw a false sense of security from a partnership agreement
Those with little to lose are often prepared to sign any agreement, just to get into the game. As a general rule, contracts are just guidelines for honest people. Document your intentions but understand that paper does not replace the need to vet your partner and to work with people who are not only trustworthy, but capable of living up to their word. The Document is there to minimize the risk of misunderstandings but partners are often surprised when others stray from the agreed upon path.
10. Tax savings
Incorporating may open up tax saving opportunities and the prospect of a better estate plan.
11. Tax issues
There are tax consequences to everything you do and they vary depending upon the structure of the relationship... always consult with your lawyer and accountant before taking any steps.
The law offices of Alan Direnfeld are at:
219 Finch Ave W, North York, Ontario, M2R 1M2.
He can be reached by calling (416) 229-6789.
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