Shareholders and Partners: Your Second Marriage

December 4, 2020

The vast majority of businesses, large and small, are private enterprises.  Excluding sole proprietorships, they typically are formed as partnerships, limited liability companies, or corporations.  No matter the legal form of the entity, memorializing the business deal with your partners is crucial. This general understanding and the details of the arrangement are outlined in shareholders’ agreement, which is often called by other names like operating agreements and partnership agreements.

Documenting Your Business Deal Should Be Priority #1

Like a marriage, business partners typically begin their business ventures full of hope and promise.  They often invest time, money, and risk personal liability without documenting their business deal with their partners.  They understandably are focused on the promise of profits to come, and possible disagreements with their partners are the furthest thing from their minds, but, given what’s at stake, documenting the business deal should be a high priority BEFORE any of the “what ifs” happen.

The Basics of a Partnership Agreement

Agreements between joint venturers – your business partners, shareholders, and members – take various forms and cover myriad topics.  They should not be confused with by-laws (something required by most state statutes governing corporate formation) or articles of incorporation.  Instead, a partnership agreement forms the backbone of the business agreement between the partners.  Here are a few of the items a partnership agreement should address:

  • Money and finances
  • Capital contributions and capital calls – What happens if the business needs more capital?
  • Distributions to partners – Do some or all partners get compensation off the top?
  • Governance – How are decisions made
  • Dispute resolution – How are decisions made? Supermajority votes for certain items?  If there is a deadlock, how is the impasse resolved?
  • Buy-sell provisions – Are interests in the business freely transferable? What happens if a partner dies? Is disabled? Gets divorced or files personal bankruptcy?
  • Exit strategies – what happens if one partner wants to sell or retire and the other(s) do not?
  • Liquidation (divorce) – If things don’t work out, who gets the right to take the assets, the name?
  • Responsibilities of the partners – Is the understanding that everyone works full-time?
  • Corporate opportunities – Who do they belong to?
  • Competition – Can a partner own or participate in a competing venture?
  • Are there passive and active partners? If so, the expectation of both should be documented.
  • Loan guaranties – If the business is borrowing money, do partners have to personally guaranty? If so, to what extent?
  • Can a partner be fired? How are working partners compensated?

This blog will examine each of the above issues and provide insight into lessons learned from almost four decades of experience as a corporate lawyer representing privately-held businesses and their partners in their business dealings and partnership disputes.

How Lex Nova Can Help

It’s never too late to outline a partnership agreement. Contact Lex Nova today to learn how a corporate lawyer can help you avoid and navigate future conflict with your business partners.