Shareholder, Partnership, and LLC Agreements
Without exception or exaggeration, creating a good agreement among the owners of the business is the most important task for the owners and their lawyer. And the time to create it is right away, as the business is being formed.
We have seen far too many businesses and relationships ruined for lack of a good agreement. You are family members or lifelong friends who are sure nothing could go wrong? Think again. Courts are filled with bitter fights among former friends and family members who thought just as you are thinking now.
Here are some key questions our business and corporate lawyers will help you address:
- Ownership Percentages: Ownership percentages, the manner in which profits will be divided, and the power to control the business are three separate things. A good agreement deals with these issues separately.
- Capital Contributions: A good agreement will establish how much money each owner will contribute, both at the outset and in the future, and lay out the consequences if an owner fails to contribute his, her, or its share.
- Distribution Waterfall: Ownership percentages don’t necessarily dictate how profits are distributed. For example, maybe the owner who contributed capital should get her money back first.
- Management and Control: Without a clear agreement, the owners of a business can find themselves arguing over control. Should all decisions require unanimous consent? Should decisions be made by the majority, with only designated major decisions (g., selling the business) requiring the vote of the minority? Most important of all, can two owners fire the third?
- Breaking Deadlocks: Of all the things that can happen to a business, the worst is a deadlock. A good agreement gives the owners a way out, without lawyers and judges involved.
- Compensation: Profits are one thing, compensation is something completely different. In most businesses, the owners should be compensated for what they do.
- Time Commitment: Many businesses start as a side gig in the garage, with the owners working part time. They should write down how much they expect one another to work.
- Restrictions on Competition: How would you feel if your partner left and opened shop across the street? A good agreement balances the interests of the individuals and the business.
- Buy-Sell Issues: Too many agreements focus only on the death of an owner. Far more likely during a five-year business horizon is that an owner becomes disabled, is divorced, becomes insolvent, or just quits and heads to the beach. A good agreement covers all these possibilities.
Talking about these issues can be uncomfortable – that’s because they’re so important. We have talked them through many, many times before and can help create a good, lasting business agreement.