Author: Sarah Nadon – Law Student
Edited By: Ryan Carson
Partnership agreements may arise informally through the shake of a hand; however, rarely is that the best course to follow when creating a partnership. Partnerships are very much like sole proprietorships however they involve two or more people.
Most partnerships, either big or small, operate subject to an agreement among the partners that lays out specific rights and obligations of every party, as well as provisions for running the company, both day to day and in the event that someone dies, or the partnership is dissolved. This article will examine the pros and cons of joint ventures and shareholders agreements as well as common mistakes that occur when entering into a business venture.
A shareholder’s agreement is an agreement between the shareholders of an existing corporation. The agreement is used to assure that owners’ rights are protected. Shareholders agreements are very fact specific and are tailored to the unique circumstances of the parties.1
This type of agreement typically deals with two basic areas:
• Control and management of the corporation; and
• Termination of the relationship of the shareholder, whether by transfer of the shares to third parties, a buy-out of the shares by a different shareholder or by liquidation of the corporation.2
In a shareholder’s agreement each party is responsible for the actions of the other shareholders. Shareholders share risk, costs and profits with one another.
A joint venture involves two or more businesses or individuals combining their resources and expertise to achieve a shared goal. Joint ventures are usually undertaken by previously established businesses. Joint ventures are relatively new meaning unlike corporations, they are the least regulated. Much like partnerships, joint ventures do involve a fiduciary duty.3
Joint ventures are typically created by express agreement, which will define the rights, obligations and prospective liability of each participant in the joint venture.4 Unlike a shareholder’s agreement, each party is responsible for the debts they acquire but split the profits according to the agreement.
The main difference between a joint venture and a shareholder agreement is whether the agreement is between one company or several, as a shareholder’s agreement cannot be created with several different companies.
Corporations are another form of a business entity structure made available to the public. A corporation is when a company’s owners operate as a single business entity and is formed by filing articles of incorporation, while a joint venture is a partnership between two or more businesses that want to work together towards a common goal.5 A corporation has a separate legal entity from its shareholders meaning it has the same rights as an individual. In Canada, corporations have all the legal rights of a person therefore they are eligible for loans, can carry on business, sue or be sued. Corporations offer limited liability and is one of the most common business structures in Canada.
Since joint ventures have no statute to govern them, they are strictly governed by the contract made between the parties. Joint ventures allow flexibility for the parties and are not considered to be a taxpayer under Canadian tax legislation while corporations are taxed by both the Ontario and federal income taxes.6
When choosing a business entity, one should consider the legal liability, the tax implications, the cost of formation, the ongoing administration and the flexibility they desire. In addition, how the entity is governed may also be an important consideration.
What kind of questions should be answered before talking to a lawyer?
Before speaking to a lawyer, one will want to have an idea of which type of agreement they would like drafted. Next, they should know who the parties to the agreement will be, when the agreement will end, if ever. The parties to the agreement should also know what the objective of the agreement is in order to help the lawyer draft a proper contract.
What to include in an agreement?
Shareholders agreement:
The right to remove directors
Terms to protect minority share holders
Restrictions on how and when someone can dispose of their shares
Limitations on what actions a director can take
A business plan to assure that all shareholders are on the same page
How to resolve a shareholder dispute
The right to first refusal clause
Joint Venture:
Type of joint venture
Benefits and risks
Financial contribution each party will make
Objective of the joint venture
Ownership of the intellectual property created by the joint venture
How liabilities, profits and losses are shared
Common mistakes
If in a limited partnership, limited partners are not allowed to take an active role in management of the partnership, as it exposes the limited partners to the same level of liability as the general partner
Not choosing the right business entity
Starting a venture without a business entity
Not filing the proper documentation for the business entity
Excluding important clauses from the business contract
Inadequate capitalization
Ignoring intellectual property and getting sued for infringement
Objectives of a joint venture are not 100% clear and communicated with everyone
Disclaimer
The content on this web site is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Users of this web site are advised to seek specific legal advice by contacting members of Carson Law, Carson IP, or their own legal counsel regarding any specific legal issues. Carson Law does not warrant or guarantee the quality, accuracy or completeness of any information on this web site. The articles published on this web site are current as of their original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose.
References
1 The Editorial Staff of LexisNexis Canada in co-operation with The Institute of Chartered Secretaries and Administrators in Canada, Canadian Corporate Secretary’s Guide (LexisNexis Canada, 2003) (loose-leaf updated 2020), (QL)
2 Ibid.
3 Meinhard v. Salmon, 62 A.L.R. 1 at 4-5 (N.Y.C.A., 1928)
4 Chitel v. Bank of Montreal, [2002] O.J. No. 2170 (Ont. S.C.J.
5 Canada Business Corporations Act, RSC 1985, c C-44, Part II.
6 Neil Hazan, “Joint Ventures in Canada: Overview” Joint Ventures Law Global Guide, August 1 2017.