Put It In Writing
June 2003

When an owner/ manager first starts out, the business may look simple enough. But add a partner or a shareholder, sprinkle in a few employees, expand your customer base and find yourself needing to deal with more and more regulations and taxation rules, and all too soon you realize the need for careful documentation.

 While business agreements are sometimes founded on a handshake and a verbal agreement and sometimes a letter of intent, perhaps it is time to put these agreements in writing. Formalizing the understandings between the company and its employees, suppliers or contractors with a written agreement or contract ensures the terms are clearly defined and avoids misunderstandings that could be costly. Of course, when you are drawing up any document that stipulates the terms of agreement between your company and other parties, it is important to get professional advice before finalizing the arrangement. 

Here are some agreements that are commonly used in business today and may be applicable in your company dealings.

Confidentiality Agreement

Whether confidentiality is addressed in a separate agreement or is included as a provision in another agreement with an employee, commission sales representative or consultant, the confidentiality agreement protects your company's interests, such as trade secrets, customer lists and other proprietary interests.

Consulting Agreement

A consulting agreement sets out matters such as the services to be provided by a consultant, the duration, and the remuneration. This agreement is important for clarifying the understandings between the company and the consultant. It also serves to establish that the consultant is not an employee for purposes of withholdings such as Workers' Compensation and income tax.

Commission Sales Agreement

A commission sales agreement sets out the terms of the relationship between your business and the commission salesperson that is representing and selling your company's products or services. Elements of the agreement usually include matters such as the structure of commission and other compensation, scope of territory and whether it is on an exclusive or non-exclusive basis, provisions if the company supplies a company vehicle, and reimbursement for travelling and entertainment. A commission sales agreement will also usually include provisions for non-competition as well as confidentiality to protect the company's interests. Like the consulting agreement, the commission sales agreement also serves to establish that the salesperson is not an employee for taxation and other purposes.

Employment Agreement

An employee agreement sets out the rights and obligations of the employee and employer, including salary and other payment structures, timing of salary increases, hours of work, arrangements for overtime and vacation time, health and benefit plans, the person to whom the employee reports, and if applicable, the provision of a company vehicle. An employment agreement will often include provisions for non-competition and confidentiality to protect the employer's interest in areas such as trade secrets, customer lists and other proprietary interests.

Management Agreement

This type of contract is essential if your business needs to contract management to assist with the business. The agreement should cover such areas as the services to be provided, the manager's responsibilities, the rate of remuneration and procedures for billing and payment, and the duration of the contract. In addition, the agreement should include provisions for confidentiality and proprietary of business items and an explicit understanding that all services provided will not breach the laws, rules and regulations that govern good stewardship of the business.

Non-competition and Non-disclosure Agreement

This agreement restricts employees, businesses, consultants or contractors who work with your business from copying or disclosing your company's processes, confidential information or trade secrets for a predetermined period or within a specific geographic area. This type of agreement lets you outsource for expertise in the development of projects without the fear of losing your investment in time and money or of having a proprietary process pirated.

Partnership Agreement

A partnership agreement is used when two or more individuals, corporations or partnerships carry on business or trade for the purpose of making a profit. This agreement typically sets out the name of the partnership, the responsibilities of the individual partners, and provisions for the retirement, death or expulsion of partners. The agreement may also incorporate dispute mechanisms, buy/sell provisions, financing terms, repayment of capital, confidentiality, remuneration, indemnification rights and a host of other issues depending on the partners' needs and the business they are in.

Shareholders' Agreement

A shareholders' agreement sets out the rights and obligations of the shareholders beyond the rights and obligations that are established by regulations and statutes of the applicable corporate legislation, depending on whether the corporation is federally or provincially incorporated. The agreement usually covers matters such as the amount of issued stock, names of shareholders and the amount and class of shares that they own. Other matters include necessary approvals by shareholders, nominees of shareholders and buy/sell provisions as well as organizational matters such as the number of directors, name of the public accounting firm, location of books and records, and the cap on the indebtedness that the incorporation can incur. As this agreement protects the interests of the shareholders, no owner-managed business with more than one shareholder should be without one.

Work with the Professionals

Formalizing the working relationship with employees, contractors, consultants, shareholders and others makes good business sense. Of course, it is not always possible to arrive at an agreement that completely satisfies all parties so negotiations may be necessary in order to find compromises that will work.

To make sure an agreement does not disadvantage your business, you are well advised to involve your chartered accountant and your business lawyer in the development and negotiating stages. Your chartered accountant can assist you in determining the current and long-term consequences for your business and personal financial planning as well as ensure that you have carefully considered any tax consequences that could arise. 

Before signing on the line, all parties should get independent legal and tax advice to ensure they fully understand the impact of the provisions of the agreement.