Co Owner Business Contract: Everything You Need to Know
It is a formal document that's created between partners that contains terms like voting rights, the entity's purpose, and partner contributions.3 min read
Updated July 7, 2020:
A co owner business contract is a formal document that's created between partners that contains terms like voting rights, the entity's purpose, and partner contributions.
What Is a Co-Owner?
According to an ownership agreement, a co-owner owns a percentage of an asset, although the amount may vary. Each owner's rights are typically outlined in a written agreement or a contract, which also specifies both tax and revenue obligations. The relationship between co-owners can also widely vary. The legal and financial obligations for each party ultimately depends on what each person wants to receive.
What Are the Disadvantages or Risks of Co-Ownership?
There are certain risks involved when sharing ownership of an asset. For example, an owner who decides to make another individual a co-owner of their company may not end up liking the way they run the business. Therefore, rather than having the opportunity to separate the individual from the business as an employee, an owner must now consider buying out the difficult individual. This is assuming that the individual would even be willing to sell their share of the company.
Consider the situation where a co-owner who has access to business funds irresponsibly gambles away significant sums of money on casino credit. As a creditor, the casino legally could come after the business account leaving the responsible owner subject to a major financial loss.
The Difference Between a Co-Owner and a Partner in Business
There is a difference between the terms "partner" and "co-owner" with regards to a business ownership. For example, depending on whether you are a partner or co-owner will influence the following:
- The extent of your personal liability for debts.
- The involvement in the management.
- How you are taxed on income.
- Your control of the enterprise.
- Your personal interest in the company's revenue.
In order to qualify as a co-owner in a business entity, the partners must have personal ownership of company-issued stock certificates. Personal liability of a co-owner is limited to the number, type, and value of company-issued stock owned. Remember, co-owners have the right to management.
Control of the entity is assigned to certain positions within the company. This is specified in the bylaws and the articles of the organization. Generally, control is distributed among the board of directors and executive members in C corporations and S corporations.
For Professional Limited Liability Corporations (PLLCs) and Limited Liability Corporations (LLCs), control is given to the general managers. A partner is considered a co-owner of a business entity that is legally recognized. By law, a partnership is a business relationship between two or more individuals, called "partners," who work together to carry out a business or trade.
Who Is a Business Partner?
In order to qualify as a partner, the following criteria need to be established:
- Partners must contribute property, money, and personal skills or labor.
- Partners should expect to share in the company's profits and losses.
Determining whether you are a co-owner or a partner is crucial for assessing personal liability toward business debts, tort claims, and income tax.
There are a number of factors that legally decide whether you are a partner or not. These include:
- Whether you contribute services or capital to the business.
- Whether you are accountable for the debts of the business.
- Whether your personal liability is limited only to your personal investment.
- Whether the partnership is your primary employer.
- The extent of your decision making and control over the business.
- Whether or not you share in the profits of the business.
If these conditions do not apply to your position in the company, then you are probably not a partner and more likely to be considered an investor.
What Is the Partner Liability?
Unless an agreement states otherwise, partners:
- Are equally and personally liable for all company obligations and debts.
- Have equal rights when making business-related decisions.
- Have equal control when managing the company.
- Have rights to equal shares of business property and profits regardless of their financial contributions or business services.
Partners who opt for limitations in the contract regarding ownership interests are considered "limited partners." Therefore, their personal liability to the business will be appropriately limited. Consistent with other business entities, investors' personal liabilities are always limited to their investments.
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