Q:           My friend and I are thinking about going into business together. He is really creative and hard-working, but he is also careless with money. For example, he once bought a pinball machine instead of paying his rent!  His credit rather sucks too. Are there ways I can protect myself?

A:            There is probably no way to completely prevent your friend from affecting either your finances or those of your business. On the other hand, if you are determined that this is the person with whom you want to team up with in a business venture , let’s look at the damage control options for yourself first, then for the business.

To protect yourself, the key is how you set up your business. A corporation protects business owners from personal liability for business debts. If you organize your business this way, your personal assets will be safe. However, if you and your friend create a partnership, you will both be personally liable for business debts – leaving you on the hook for your friend’s spendthrift tendencies.

Stopping your friend’s financial shenanigans from getting the company, not just you, into a bind will take more day-to-day effort on your part.

Here are some tips:

• Limit your friend’s authority over expensive contracts and purchases. For instances, all major contracts should contain a paragraph stating that they are not binding on the business unless at least two officers of your corporation signs on them.
• It is a good idea that your friend not be able to give outsiders the impression that he has authority to bind the company –by bearing the title of president or vice president, for example.
• If you really want to keep your friend’s hands out of the company cookie jar, make sure you are the only signatory on the company bank account, hide the cheque book, and read your company credit card statements very, very carefully.

Keep in mind that unless your friend openly admits to his pecuniary problem, he probably will not greet these ideas with delight. However, your friend should not mind signing a “buy–sell agreement,” which will control what happens when one of you want out of the business.

In addition, who knows, maybe you will actually enjoy the occasional pinball game!

For solutions on how to bullet-proof your business, contact us for a consultation.

Douglas J. Green

Brief informational summaries about commercial litigation matters in the courts of Ontario and other developments are periodically published on this website. They are intended to be a general comment or general discussion, not legal advice and should not be relied upon as legal advice. Should you require legal advice, please contact info@heydary.com or 416 972 9001.