Starting a business can be one of the most exhilarating and daunting ventures in a person’s life. For that reason, planning strategically and having the right documents in place from the onset is essential to overcome the main challenges and risks of starting your own business. These are three documents that you may need in the early stages of your business endeavor:
1. Shareholders’ Agreement
A shareholders’ agreement documents the general business agreement between the shareholders about how the company will be owned and managed. There is no legal requirement for there to be a shareholders’ agreement, but neither applicable provincial or federal corporate laws nor the company’s articles address the issues covered off in a shareholders’ agreement, which are often most important to shareholders. It is therefore beneficial to have a shareholders’ agreement to “fill in the cracks” between the corporate laws and the company’s articles in light of the expectations of everyone involved.
For example, the shareholders’ agreement may set out how the shares of the company can or cannot be transferred. Some of the scenarios it can cover include the transfer of shares due to death, disability or matrimonial breakdown.
Careful planning and consideration must be given by shareholders and their advisors in order for the shareholder’s agreement to address current issues as well as anticipate some of the eventualities that could arise throughout the life of the company.
2. Loan Agreement
At its earliest stages, a company typically requires some financing to operate. The simplest method of getting financing is by obtaining a loan from the company’s shareholders.
A shareholder who loans money to a company can more easily recover the investment than a shareholder who finances a company by purchasing shares. A loan can easily be paid back with very little work on the part of the company, but repayment of an investment in the form of shares is much more complicated as it involves the redemption or repurchase of shares.
Before you loan funds to the company, it is important to set out the terms and conditions in a written agreement between the company (the borrower) and, yourself, the shareholder (the lender). The terms of such a loan agreement will vary depending on the circumstances but generally will include the amount advanced, the interest rate, the terms of repayment, the type of security and the default scenario that would permit the shareholder to call the loan and enforce the security.
3. Security Documents
A shareholder who loans money to a company may take security for the loan from the company. A general security agreement (GSA) is an agreement between a lender (the shareholder) and a borrower (the company) whereby the company pledges all of its property and assets (other than real estate) to the shareholder as security for repayment of the loan.
These assets are broadly described in the GSA and will include whatever the company owns, including vehicles, machinery, equipment, receivables, inventory (both raw materials and finished goods), cash, shares and intellectual property. The GSA typically covers both property that is currently owned by the company as well as property acquired in the future.
Having a GSA in place for each of the initial shareholders who have loaned the company money and registering notice of this security at the British Columbia Personal Property Registry will ensure that the shareholders’ security will generally take priority over unsecured creditors. In other words, if the company defaults on its payment obligations and there are competing creditors, the shareholders will have a claim against the assets of the company.
This article should not be relied upon as legal advice - the comments may not be applicable to you and may not be up to date. If you have any questions, you should contact a lawyer.