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Do I owe money if I leave my start up? I own 20% of the company but only contributed 5% of capital.

My partners and I started a company earlier this year, there are a total of 4 equity partners. We're all Canadians and the company is based in Ontario, Canada if that affects anything. The company still has no revenue however there has been a lot of accrued debt and capital injections by the partners and myself.

In total, I've only put in about 5% of the capital and my partners have been covering the difference (15%). I've been working full time to help get this company started but I can't stand my partners anymore. I want to leave the company.

1. Do I owe the 15% difference in capital?
2. Do I owe 20% of the accrued debt to date?
3. What happens with my 20% shares of the company?
4. Can I sell my 20% to the other partners to cover what I owe to the company (assuming the answer is yes to #1 and #2)?
5. When I hand in my letter of resignation to my partners, do I need to include anything about the 20% shares that I own?

PS: Aside from the generic articles of incorporation that was filed when we formed the company, there isn't any other agreements that I know of. Can they backdate a corporate document to screw me over since they have majority share of the company?

I hope you guys can shed some light on my situation, I look forward to reading your replies.

Thanks in advance,
Priam

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6

#1 Get legal advice from someone in your jurisdiction.

The answer is going to depend a great deal on:
Corporate structure: corporation, LLC, partnership, etc. (and how those are treated under your laws)
Any/all agreements in place, including compensation for your time.
Whether the debt has been signed off personally or only in company name.

The main lesson you should take from this: corporate structure is important, and it's important that it be in writing, including termination provisions!

Which brings us back to...
#1 Get legal advice from someone in your jurisdiction!

4

You need to rely on legal counsel from your jurisdiction. Any answer here is one out of ignorance. It will be worth every penny that it cost you!

Legal counsel from Jurisdiction is important, yes.

4

Using US law (I am not an attorney), if you are incorporated and if you have never personally agreed to responsibility for the debt then you MAY not be responsible. If nobody signed personally for the loan then nobody should be personally responsible.

As for the shares, you should offer to sell them the shares for $100 (it makes it a transaction) and that would end your ownership as future risk may not come from debt but from tax issues that can create personal responsibility in the US.

You really need to talk to a business law attorney and you need to pay him for his time.

I agree with the suggestion and the buyout on the business. I've been in partnerships and llcs, and kind of get your point. However, the last sentence sounded so rude coming from a professional; it blocks relationships - sometimes people only need ideas to finding the best lawyers or accountants, creating a set of good questions to aks professionals, and because words of mouth are valuable in business and leads, there are soft strategies that can better be used. Just my humble comment.

4

You should charge for your work at market value. So that is in fact - assuming you did not get paid - contribution made by you. At this point the 20% shares are worth nothing. In addition, unless you signed an IOU for the 15% (of your 20%) put in by your partners you don't owe the company anything. You got your 20% shares, period. You can resign, and that means you still own 20% but you don't accrue unpaid wages. If you don't want to keep the 20%, you can as James suggested transfer that to the partners at par value.

4

If you want to leave and your partners are staying providing that the business exist although no revenue, they owe you the 15% and it's a commitment that it should be payed back by you at it's value the date the 15% been paid, but not at it's market value which makes it low value as the company struglling and in bebt, however, you still have 5% of ownership, which make you offering them to buy at agreed price between you and one or/all partners, last thing is the full time work compensations which can be added to the agreement with the your partners to reduce the debt of 15% of your shares.

3

As everyone has said, get legal advice. Not only are there written agreements. There are verbal agreements too. Personally I would be looking to sell my part of the business.

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