The promoter of a business is a person working to get a business started before the formation of a legal entity. That person could be an employee, a friend, a lawyer, a spouse, or one of the partners.
Why Does it Matter Who The Promoter Is?
Determining who the promoter of a business is can have a large impact on the limited liability issues of a business. Let’s talk about a couple of places liability protection could affect you if you are working with a business that does not yet have limited liability:
Before an entity is formed (if you have convinced the owners to form the entity), anything you personally do to further a business plan is not protected until you have formed an entity. Someone working for a business before an entity has been formed is called a “Promoter”. Under the law, promoters are personally liable for anything they agree to before the entity is formed. Do not, under any circumstances, sign any contracts or incur any liabilities before the formation of the entity that offers you limited liability. Especially if you aren’t going to be one of the partners. You should have a conversation with anyone wanting you to help them form a company that they need to actually form the entity before you begin working to make sure you are not personally liable for any of the debts of the company.
Partnership of Promoter Presumed
If you fail to convince your future bosses to form an entity with liability protection, try to at least get your relationship with the business in writing. If your relationship with the business owners is not documented, there may be a presumption that you are a partner in the company. A partnership is two or more people who come together with a common business purpose with an agreement to share the profit. So, if you , in the early stages have any salary tied to the business profits (or you forego a paycheck during the early phases), you may, absent any proper documentation, be considered a partner.
Even if you are going to be a partner in the business, being a promoter without any written documentation ensuring the business is covering your debts can create some major issues for you because you may be personally liable for the debts of the business.
If you are not one of the partners, being a promoter may create problems for the actual owners of the business as you may be able to claim they owe you some portion of the profits because you were technically a partner. If a situation like this ever goes before a judge, they will start with the presumption of partnership and you or the owners will have to prove otherwise (depending on what is in your best interest).
The lesson in all of this is that, whatever you do, make sure you GET IT IN WRITING.