Alex Koch
This week on Write-or-Die Girl, lawyer Alex Koch schools small business owners on preventing future shareholder squabbles by firming up company terms in writing.
All individuals starting a business set out with best intentions. However, most businesses go through both good and bad times, as circumstances change along the way.
When a company is owned by more than one person, preparing a shareholders’ agreement can help business owners ensure a smoother resolution to any issues and reduce the impact of these issues on their business.
The best time to set a road map for how to deal with disputes is at the earliest possible time — when the co-founders are on the same page.
How do I know if I need an agreement?
A shareholders’ agreement isn’t simply an issue to be considered by a company with co-founders. In certain circumstances, even solo business owners should consider having a shareholders’ agreement (or a shareholder’s declaration) prepared—for example, when a business owner is preparing for future expansions or is trying to provide clarity on what happens should the solopreneur pass on or become permanently disabled.
There is no legal requirement for any company to have a shareholders’ agreement; however, it is in the best interests of the shareholders, as well as the business itself, to have one in place.
Shareholders’ agreements typically cover the following areas:
- Company decision-making
- How disputes are to be handled
- How additional individuals can become shareholders
- How existing shareholders can exit the company and transfer their shares
- How dividends are paid by the company
- What happens when existing shareholders pass on, become permanently disabled, are bankrupt, or go through a divorce proceeding
The cost of preparing a shareholders’ agreement will be insignificant if it helps prevent or diminish a future dispute. There is no such thing as a “model” shareholders’ agreement, as these documents are flexible and allow shareholders to negotiate their rights and obligations.
Contact Insight Legal if you’d like to learn more about shareholders’ agreements and whether your company needs one.
Alex will be at the CNE’s Innovation Garage this weekend, August 18-20, ready to answer questions about the legal aspects of your small business. Drop by, and be sure to tell her Write-or-die girl sent you. 😉
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STEP 2 – CHOOSE YOUR BUSINESS NAME
STEP 4 – REGISTER YOUR BUSINESS
STEP 6 – RENEW YOUR BUSINESS REGISTRATION
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A sole proprietorship is the most commonly used form of organization by new businesses and startups while their costs of operation and income are low. In a sole proprietorship, one individual owns and controls the business. This type of business structure does not require cumbersome reporting to regulatory authorities and thus is easy to establish and maintain. Nonetheless, there are some registration requirements applicable to sole proprietors. For instance, if a sole proprietor carries on business under a name other than his/her legal name, he/she must register such trade name. It is prudent for a sole proprietor to conduct a name search prior to registering a business name to ensure that the chosen business name is not the same as, or similar to, the name of an existing business.
A partnership is used as a business vehicle when two or more individuals decide to engage in a business venture and wish to share the profits and liabilities of the business. Discussed below are three types of partnerships. While each type of partnership has its unique features and registration requirements, there are certain features that are shared by all types of partnerships. For instance, all of the types of partnerships are similar to sole proprietorships with respect to liability and tax repercussions discussed above, with each partner reporting losses and income on his/her personal returns.
A joint venture (“JV”) is used when two or more individuals or businesses wish to bring their resources together to achieve a common business goal. There is an effort made by the parties in a JV to work together on a common project for a limited period of time. There can be many different reasons for forming a joint venture including business expansion, selling of products through the distribution network of a bigger company, moving into new markets, sharing resources, sharing expertise, new product development, etc. Unlike with partnerships, there is no legislative document that governs the relationship of two venturers, making it very important for the venturers to capture their intentions and relationship in a legal document. A Joint Venture Agreement will include various detailed provisions including those dealing with capital invested by each party, how profits will be shared, responsibilities of each venturer, the extent of each venturer’s liability, ownership of intellectual property and process of dissolution of the joint venture. A well drafted Joint Venture Agreement can help each party avoid lengthy and costly litigation to resolve matters that may arise.
A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that a natural person possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. A corporation is also the most regulated form of business structure. Further, it is more expensive to set up, maintain and dissolve. When incorporating a business, it is very important to determine whether the company should be incorporated under federal or provincial jurisdiction. The decision to incorporate either federally or provincially can be based on a number of factors such as, price, the geographic area of operation or proposed operation of the business and the need to protect the business name across the country. Choosing a jurisdiction can have important ramifications for a business for instance, for a business interested in expanding nationally or in securing a business name nation-wide, a federal incorporation may be preferable. On the other hand, provincial registration may be preferable when the operation of a business is limited to one or few provinces only.
A co-operative is an organization where its members join together with a common goal of sharing their resources in a democratic way. Unlike with corporations where the voting power of each shareholder depends on the amount and class of shares held, co-operatives normally have a one person one vote policy allowing each member to contribute to the decision-making process of the company. Co-operatives can be structured as a not-for-profit or for-profit organization and just like corporations, co-operatives can be incorporated provincially or federally. What makes most co-operatives different from corporations however, is the fact that members of co-operatives normally make policies and by-laws for their decisions. While co-operatives allow businesses to operate in a democratic fashion, this structure may prevent progress in a business as it may take significantly longer for co-operatives to reach a decision – especially if there is a high number of members.
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