Before diving into the difference between a shareholder agreement and a partnership agreement, we need to know what is the definition of a shareholder and a partner. A shareholder is a business or entity that owns a part of the company’s shares. Owning a part of the company’s shares enables shareholders to benefit when the business profits. The benefits would be received by shareholders in the form of dividends or an increase in the stock value. Whereas a business partner may be considered as an investor who joins the company and works together to run the company.
Obviously, the two also share their differences despite sharing the same purpose to tie a legal bond between two parties. So without further ado, let’s discuss the difference between a shareholder agreement and a partnership agreement.
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Ownership & Liability
In terms of business ownership in shareholder agreements, the shareholders and the business is considered a separate legal entity. Therefore, the shareholders and the business’ liability is separate as well. This means that if the business files for bankruptcy, the shareholders might not be considered bankrupt.
Different from shareholders, when someone has signed a partnership agreement with a corporation. Depending on whether or not there is a limited liability agreement, the partner might share the liabilities of the business. Meaning that if the business goes bankrupt, the partner would be deemed bankrupt as well. In a partnership, the partners share the profit, loss, and responsibilities in the business as owners.
A shareholder is allowed to change ownership of their shares with the approval of the board of directors. The shareholder would then have to sign The Share Transfer Form (Form 32A) with witnesses who are not their spouses. The shareholder would also be responsible for the payment that has to be made for the stamp of duty for the ownership transfer.
The difference between a shareholder agreement and a partnership agreement is the terms of an ownership transfer. A partner is not allowed to do an ownership transfer if the other partners in the company do not want the ownership transfer. Hence, in a partnership agreement, the terms of ownership transfer would be slightly different.
Length of Agreement
Even though the terms of getting out of a partnership might be more difficult than an ownership transfer of shares, there is a lifespan in partnerships. Depending on the agreement made between the two parties, the partners usually creates a term in the agreement stating the length of their partnership and how to terminate their partnership.
In the case of the shareholder agreement, such terms are usually not included in the contract because shareholders are allowed to sell part of their shares. As each shareholder might hold different values of shares, the shareholder agreement has terms for an ownership transfer instead of a termination.
The difference between a shareholder agreement and a partnership agreement is the profit or earning terms and conditions. In a shareholder agreement, there are usually terms to remunerate the shareholders with dividends or an increased value of the company’s shares. Shareholders earn when the business profits. However, with a partnership agreement, the business partner would be entitled to a salary if the partner works for the business as well.
Despite the differences between a shareholder agreement and a partnership agreement, the two actually share some similarities as well. The function and reasons to create the agreements are quite similar. A shareholder agreement and partnership agreement is created to tie a legal bond between two parties, ensuring that both parties are legally responsible for the terms and conditions in the agreement.
So as you can imagine, creating these agreements is a crucial step to go through before having a partnership or shareholder relationship. Hence, it is important to ensure that your contracts and agreements contain all the necessary information, terms, and conditions that would create a fair bond between your company and your signee.
To create a fair and complete legal agreement, make sure that you have the best resources and information from a corporate lawyer. Although it is possible to draft your own agreements, it is safer to hire a professional who is proficient in the legal field, to avoid any future issues caused by an incomplete or inefficient contract.