Protect your business before it starts  Flasher Greenberg PC

Protect your business before it starts Flasher Greenberg PC

So you and your friend have decided to start a new business. You’ve settled on a concept and found the location you think is perfect. You’ve even talked to your banker about financing, and you’re excited to get started on your dream business. But slow down for just a minute. Before you spend a penny, sign a lease or loan, or go ahead with your plans, you owe it to yourself and your partner to make sure you have a good, solid property agreement in place.

The first step is to decide what kind of business you want to create. The main reason you want to form a business entity is to protect your personal assets from liability for business liabilities. In most states, the most common choices are a partnership, corporation, or limited liability company (LLC). While each of these business types offers owners personal protection from liability for the business’s liabilities, they differ in many important ways, particularly in the taxation of income generated by the business and distributions to owners, and each is governed by: a number of other laws. A business lawyer experienced in business entity formation and your accountant can help you decide which type of entity best suits your business needs.

Regardless of the type of business entity you create, you should always have a written agreement between or between you and your co-owners. That agreement will take the form of a Partnership Agreement, LLC Operating Agreement, or Shareholders Agreement, depending on the type of business entity you choose. The agreement will govern all aspects of the relationship between or between business owners. Because no two companies are alike, your agreement should be drafted specifically by a business attorney experienced in drafting such agreements. Although a custom agreement is more expensive than the off-the-shelf variety, it is worth the investment and will save you money in the future when you can use the agreement to solve a crisis the company is facing. You can help control its cost by discussing key components of the agreement with your co-owners before meeting with an attorney. Regardless of the type of business entity you are forming, here are some questions that should be addressed in your contract:

  1. First, business founders need to decide who owns the business and with what shares. Ownership interests determine who gets paid and how much when the business or any of its assets are liquidated, and who is entitled to what share of the profits while the business is in operation. The agreement should clearly define who owns what shares of stock if the company is a corporation, or the interests owned by each owner if it is a partnership or LLC.
  2. Next, owners must decide how various management decisions will be made. Management authority and responsibility, on the one hand, and ownership interests, on the other, are two separate issues and both should be addressed in your agreement. Although voting interests are often divided among owners in the same percentages as ownership interests, they do not have to be, and there are often good reasons why they should not be. For example, one of the owners may be a “silent partner” who you want to own a share of the company and be entitled to be paid out of the profits, but not have management authority, except perhaps for some key decisions; Similarly, if there are many owners, it may be too impractical, expensive, and inefficient to require each owner’s vote on a day-to-day decision. You may decide that certain types of business decisions, such as day-to-day operational decisions, should be made by the Managing Owner, while more important “life of the business” decisions, such as decisions to hire or terminate or sell an owner. to dissolve the business, a majority or even a supermajority vote of all owners may be required. In all cases, owners should clearly state in the contract how different types of decisions will be made and who can vote on which decisions.
  3. The ownership agreement should not only identify the owners and their ownership interests, but should also designate the initial officers (CEO, president, CFO, treasurer, secretary, etc.) and define their responsibilities to the company as well as their powers. make decisions for the company. The agreement should also specify who has the authority to dismiss and the mechanism for appointing a replacement. Finally, you should consider whether your company needs or is required to have a Board of Directors and whether decisions are vested in the Board. Your attorney can help you make that decision.
  4. In some cases, there is a legal requirement that if the business is a partnership or LLC, it appoints a “Tax Matters” owner to be responsible for dealing with certain tax matters for the business, and that owner must be named in the contract. Your accountant or lawyer can explain the legal responsibilities of a Tax Owner.
  5. Depending on how the voting interests are distributed, there may be an impasse on a business-critical issue. If not resolved, such an impasse could threaten the continued viability of the company. The agreement should specify what happens in the event of such an event. For example, owners may agree to follow the decision of a trusted neutral third party to break such deadlocks (such as the company’s accountant or lawyer), or they may agree to mediate deadlocks or be bound by the decision of a particular arbitrator. Alternatively, the agreement may provide that the company will end the impasse on a matter important to the future of the business. Regardless, the agreement should specify how voting deadlocks will be resolved. If the agreement is silent on this important issue, you will likely end up in court and waste the business and its owners money. I have conducted many such disputes. trust me when I tell you that no one will be satisfied with the court’s resolution of the dispute, whatever it may be.
  6. The agreement should clearly describe what each owner is contributing. Perhaps, for example, one owner will invest cash or credit into the business, while the other invests in “equity.” Under that scenario, owners must decide how to value the equity investment in order to distribute ownership interests. Failure to consider these issues clearly at the start of a business can lead to resentment and accusations of unfairness.
  7. Likewise, if the business needs additional capital later, whether for expansion, capital improvements, or anything else, the contract should specify how that capital will be raised, whether the owners are required to contribute it, and if so, in what proportions. and how those additional investments by owners are credited. What if one owner contributes and the other does not? There are several possible answers to this question. For example, the interests of a contributing owner may be enhanced relative to a non-participating owner, or the inability or refusal of one owner to make a capital contribution may trigger a buyout by a contributing owner. No matter which outcome you choose, it must be spelled out in the agreement.
  8. The agreement should also specify how and when the business income will be distributed to the owners. For example, will any of the owners be paid a salary for work done for the business before the profits are calculated, or, conversely, will the owners’ compensation be limited to their respective share of the profits. Will the owners be entitled to raffles against their expected share of the business profits, and if so, to what extent and frequency? In addition, the agreement should outline how the books of the business will be kept. Your accountant can help you with that decision.
  9. The agreement should address a number of issues related to changes in ownership. For example, the agreement should set forth the procedure and voting required to admit new owners, the procedures for an owner to purchase another owner’s interests, whether owners’ interests are transferable to non-owners with or without the company’s approval, and if: So the mechanism of its implementation. The agreement should attempt to anticipate the many life events that may interrupt or alter the business relationship, such as the death or disability of an owner, the divorce of one of the owners, the inability or unwillingness of the owner to contribute capital, or the inability of one of the owners to legally hold a liquor license. In all such cases, the agreement must specify the mechanism for transferring ownership and voting interests, the method used to value those interests, whether the company or the remaining owner(s) will have the right to buy out the departing owner’s interest, and the method of raising cash to buy out the departing owner.
  10. One important decision that deserves special attention in an agreement is what happens in the event of the owner’s death or disability. For example, will that owner’s interest be transferable to another family member and, if so, will the family member receive any voting rights or just a right to a share of the company’s profits? It is one thing to share the profits with the deceased owner’s spouse or child; It is quite another to allow that person to dictate how the business is run in the future, especially if they have had no previous involvement in the business or management of the company.
  11. If the owner is contributing intellectual property to the new company, such as, for example, a patent or trademark, customer lists, vendor contact information from another business, or the company name, the agreement should specify whether the intellectual property will be donated, sold, or licensed to the new company. how it will be valued and paid for and what happens to it after the business is wound up. Similarly, if either owner provides equipment or other tangible property, ownership and valuation thereof should be addressed in the contract.
  12. Finally, each agreement must specify a mechanism for resolving disputes between owners, designate a tribunal to resolve such disputes, and define the body of law (state or federal) that will apply, in as much detail as possible, and a mechanism for resolution. the company and the management of its assets and distribution of income.

While it is impossible to predict every issue that will arise during the life of a business, the issues discussed above occur so regularly that they are predictable, which is why these basic provisions should be included in every business ownership agreement. In addition to the above, there are many other provisions that can be included in an ownership agreement, depending on the nature of the business and its owners. It is much easier and cheaper to think about and address such things in the formative stage of a business than when a company is facing an unexpected crisis. A business attorney who has previously formed business entities, especially in your particular industry, can help owners identify other potential problems and determine how to address them if and when they arise.

TAKE: Before starting your business, consider the important business decisions above. Everyone will be too busy with the business once it’s up and running to have the time or inclination to make the decisions that need to be made before the business starts to protect it in the future when one of these issues arises. Do yourself a huge favor and address these issues BEFORE you take action. You’ll thank yourself down the road when one of these issues comes up.

PS: It’s never too late to create a personalized agreement for your business. If you own or operate a business without the consent of the owner, stop now and consult a business lawyer before a crisis arises.

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