Formalizing a Decade-Old Handshake Partnership in Guelph

The situation

Bohdan, an accountant, and Taras, a pharmacist, started distributing sports nutrition and supplement products out of Bohdan's garage about eleven years ago. It began as a side project between two friends with day jobs. There was no written agreement. They split startup costs evenly, split the work as it came, and split whatever profit was left over at the end of each year. Neither of them thought of it as a business that needed paperwork; it was just something they did together on evenings and weekends.

The business grew steadily and then, in the last few years, grew quickly. By the time Bohdan called Treadstone Law, the company was moving product through several regional retailers and a growing e-commerce channel, with annual revenue in the high seven figures. It had a warehouse lease, four employees, and a banking relationship that required real financial statements. It also, still, had no partnership agreement, no shareholder register, and no corporate entity at all — everything ran through a sole proprietorship registered in Bohdan's name, with Taras trusted on a handshake to have an equal share.

Around year four, a third person had joined: Xia, who took over sales and retailer relationships and, according to her account, was promised a meaningful ownership stake in exchange for walking away from a stable job to do it full-time. Bohdan and Taras remembered that conversation differently — as a generous profit-sharing arrangement, not an equity promise. The three of them had coexisted comfortably for years because the business was doing well enough that nobody had to test what they'd actually agreed to. Incorporating forced the question, because incorporating meant deciding, on paper, exactly who owned what.

The legal problem

Under Ontario's Partnerships Act, a partnership exists whenever two or more people carry on business together with a view to profit — whether or not they ever call it that or sign anything. On the facts as everyone described them, Bohdan and Taras had been partners for over a decade without knowing it in a legal sense. Where a partnership has no written agreement, the default rules in that Act apply, including a default rule that partners share profits and losses equally regardless of what each contributed. That default did not obviously fit a business where Bohdan supplied the initial capital, Taras worked fewer hours in later years due to his pharmacy job, and Xia had taken the biggest personal risk by leaving employment.

Xia's position raised a separate problem. She said she had been promised equity — not just a share of annual profit, but ownership in whatever entity the business eventually became. If true, that promise, even though never written down, could potentially be enforceable as a contract or could support a claim that she was owed compensation for relying on it to her detriment. Ontario's Limitations Act, 2002 generally requires most civil claims to be started within two years of when the problem was discovered, which meant Xia's claim was not time-barred — she had raised the concern as soon as incorporation talks began, not years after the fact.

The immediate business need was to incorporate under the Business Corporations Act (Ontario) so the company could bring on institutional retail partners who required dealing with a corporate entity rather than a sole proprietorship, and so Bohdan was no longer personally liable for every contract and lease the business signed. But incorporating would require someone to decide, in a shareholder register, exactly what percentage each of the three people owned. That decision could not be made until the underlying dispute over Xia's promised stake was resolved, because issuing shares on the wrong split would have locked in whichever version of events happened to win the drafting process.

What we did

1. Separated the incorporation question from the ownership dispute. Our team advised Bohdan and Taras that the two problems needed to be solved in sequence, not together. Rushing to incorporate with an equity split that Xia disputed would have created a company built on a disagreement, likely to resurface later with more money at stake and less goodwill left to resolve it.
2. Reviewed the historical record for evidence of the arrangement. There was no written agreement, but there were years of bank transfers, tax filings, and email exchanges. We asked for everything: how profit had actually been distributed each year, any messages referencing ownership or equity, and the payroll and contractor records showing how Xia had been paid. The pattern that emerged showed Xia had been paid a base salary plus a discretionary year-end bonus tied loosely to profit — consistent with generous compensation, but not conclusive proof of an equity promise either way.
3. Facilitated a structured negotiation among all three, each with independent advice. Because our firm was retained by Bohdan and Taras, we could not advise Xia, and we told her plainly that she should get her own lawyer before agreeing to anything. Once she did, the three sides worked through a negotiation over several weeks: what contributions each person had made, what risks each had taken on, and what a fair going-forward structure looked like regardless of who was technically right about the original conversation.
4. Drafted a dissolution and release for the old partnership, and a fresh incorporation. Rather than trying to reconstruct exactly what the informal partnership had been, the parties agreed to wind it up by mutual release, with each person releasing any claims arising from the prior arrangement in exchange for their agreed stake in the new corporation. This avoided years of uncertainty about proving informal promises and let everyone start the new entity on clean, written terms.
5. Built a shareholders' agreement that addressed what the handshake never covered. The agreement set out vesting for Xia's shares tied to continued involvement over several years, a valuation method for any future buyout, decision-making rules for the three shareholders, and a process for what happens if one of them wants to leave or the others want to remove someone. None of that had existed before; all of it was now written down before anyone needed it.

The outcome

The final split gave Xia a real, meaningful ownership stake in the new corporation — smaller than the full equal-thirds she initially believed she had been promised, but significantly larger than the profit-sharing-only arrangement Bohdan and Taras had first proposed. Her shares vested over four years rather than issuing all at once, which addressed Bohdan and Taras's concern about giving away permanent ownership for a role that, at the time of the original promise, had not yet been tested over the long run.

Bohdan and Taras gave up more equity than they had wanted to concede, and accepted that some of the ambiguity around the original handshake would never be fully resolved in their favour. Xia, for her part, accepted a vesting structure and a share percentage below what she believed she had been promised, in exchange for certainty and a written agreement that protected her position going forward rather than leaving it dependent on goodwill. Neither side walked away with everything they thought they deserved, which is the honest description of most negotiated compromises — but the business was incorporated, the three-way relationship survived, and every shareholder now has a document to point to instead of a memory to argue about.

The company completed incorporation and began operating as a proper corporation within a few months of the first meeting, with the shareholders' agreement in place before the first share certificate was issued. The retail partners who had been waiting on the corporate structure signed on shortly after.

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