Main menu


Protect Your Business Before You Start | Flaster Greenberg PC

featured image

So you and your friend decided to start a new business. You agreed on the concept and found a place that you thought would be perfect. You’ve even talked to bankers about financing and are excited to start your dream business. But just slow down for 1 minute. Before you spend money, sign lease or loan papers, or move forward with your plans, make sure you and your friends have proper and strong ownership agreements. there is.

The first step is to decide what form of business you want to create. The primary reason for forming a business entity is to protect personal assets from liability for business obligations. In most states, the most common choices are a partnership, corporation, or limited liability company (LLC). Each of these business types personally protects the owner from liability for business obligations, but they differ in many important ways. In particular, it concerns the taxation of the income generated by the business and its distribution to the owners. another legal system. Business attorneys and accountants experienced in forming business entities can help you determine the type of organization that best suits your business needs.

Regardless of the type of business entity you create, you should always have a written agreement with your co-owners. That agreement takes the form of a partnership agreement, LLC operating agreement, or shareholder agreement, depending on the type of business entity you choose to form. Contracts govern all aspects of the relationship between or between business owners. No two businesses are the same, so the contract should be drafted by a business attorney experienced in drafting such contracts. Custom contracts are more expensive than off-the-shelf ones, but they are well worth the investment and can save you money in the future when you can use them to solve the crisis your company is facing. You can keep costs down by discussing the basic elements of a contract with your co-owners before you consult with your co-owner. Here are some issues that your contract should address regardless of the type of entity you are organizing.

  1. First, business founders must decide who will own the business and what they will share. Ownership determines who is paid when a business or any of its assets is liquidated, how much is paid, and who is entitled to what portion of the profits while the business is operating. increase. The contract should clearly state who owns how many shares if the company is a legal entity, or what percentage each owner owns if it is a partnership or her LLC.
  2. The owner then has to decide how various administrative decisions will be made. Management authority and responsibility on the one hand, and ownership on the other, he said are two separate issues, both of which must be addressed in the contract. Voting rights are often divided among owners in the same proportion as ownership, but this need not be the case, and often there are good reasons why it should not be. For example, one of the owner’s girlfriends may be a “silent partner” who wants to own shares in a company and be entitled to a share of the profits, but without administrative rights except in certain cases. major decision. Similarly, if there are multiple owners, it can be cumbersome, expensive, and inefficient to require the votes of all owners in daily decisions. Management owners may decide that some types of business decisions should be made, such as day-to-day operational decisions, but more importantly, owner approval or termination, or sale or sale You will need to make “business survival” decisions, such as deciding whether to A majority or supermajority vote of all owners may be required to dissolve the business. In either case, the owner must clearly stipulate in the contract how the different types of decisions will be made and who will vote on which decisions.
  3. The ownership agreement should not only identify the owner and their ownership, but also designate the first officers (CEO, President, CFO, Treasurer, Secretary, etc.) and define their duties and powers towards the company . Make decisions for the company. The contract should also mention who has the authority to remove officers and the mechanism for appointing replacements. Finally, you should consider whether your company needs a board and whether decisions reserved for the board should be made. Your attorney can help you make that decision.
  4. In some cases, if your business is a partnership or LLC, there is a legal requirement that you designate a “tax matter” owner responsible for handling certain tax matters for your business, and designate that owner in your contract. I have a requirement. Your accountant or attorney can explain the owner’s liability for tax matters.
  5. Depending on how voting rights are allocated, stalemate can occur on issues important to the business. Such stalemate, if not resolved, could threaten the company’s continued viability. The agreement should specify what happens in such cases. For example, the owner agrees to follow the decisions of a trusted and neutral third party (such as the company’s accountant or attorney) to resolve deadlocks, to mediate deadlocks, to identify agree to be bound by the arbitrator’s decision. Alternatively, the contract may stipulate that the company will terminate in the event of a deadlock on an issue important to the future of the business. Regardless, the agreement should specify how voting deadlocks are resolved. If the agreement remains silent on this important issue, it will likely end up in court, wasting the money of the business and its owners. I have had many such controversies. Believe me when I tell you that no one is satisfied with the court resolution of disputes, whatever it may be.
  6. The contract should clearly state what each owner provides. For example, one owner provides cash or credit to the business, while another provides “sweat capital.” Under that scenario, the owner would have to decide how to value Sweat’s equity contribution for the purposes of allocating ownership. Failure to think clearly about these issues at the start of a business can lead to resentment and accusations of unfairness in the future.
  7. Similarly, if the business later needs additional capital, whether for expansion, capital improvements, or other reasons, how will that capital be raised and should the owner donate it? Please, the contract should specify what to share, if any. How these additional contributions by owners are credited. What if one owner contributes and another doesn’t? There are several possible answers to this question. For example, the interest of a sponsoring owner may increase compared to a non-sponsoring owner. Alternatively, the inability or refusal of one owner to contribute capital may trigger a buyout opportunity by the contributing owner. Regardless of which outcome you choose, it should be specified in the contract.
  8. The contract should also state how and when the profits of the business will be distributed to the owners. For example, are any of the owners paid for their work in the business before profits are calculated, or conversely are the owners’ compensation limited to their respective share of the profits? Are parties entitled to draw lots for the expected distribution of business profits, and if so, how much and how often? must be listed. Your accountant can help you with that determination.
  9. The contract should address various issues related to change of ownership. For example, the contract may include the steps and votes required to admit a new owner, the steps for an owner to buy out another owner’s ownership, whether the owner’s ownership is transferable to a non-owner, Company approval or not, and the mechanism for doing so. The contract contains many things that may interrupt or change the business relationship, such as the owner’s death or disability, the owner’s divorce of one of her, or the owner’s inability or unwillingness to contribute to the capital call. should try to anticipate all of the life events of or the inability of one of the owners to legally hold a liquor license. In all such cases, the contract will specify the mechanism for transferring ownership and voting rights, the method used to value those interests, the company or the remaining owners purchasing the leaving owner’s interest. You must specify whether you have the right to How to raise cash to buy out a vacating owner.
  10. One of the key decisions to pay particular attention to in a contract is what happens in the event of the owner’s death or disability. For example, can the owner’s ownership be transferred to another family member? If so, will the family member receive voting rights, or only the right to receive a portion of the company’s profits? It is one thing to share the benefits with your spouse or children. Allowing that person to have a say in how the business will operate in the future is quite another. Especially if you have never been involved in business or company management before.
  11. If the owner has provided intellectual property to the new company, such as patents or trademarks, customer lists, contact information for vendors of another business, or the name of the business, the contract will provide the intellectual property to the new company. You must specify whether How it will be valued and paid if donated, sold or licensed to the new company and what will happen to it when the business is dissolved. Similarly, if one of the owners is donating equipment or other tangible assets, that ownership and valuation should be addressed in the contract.
  12. Finally, all contracts must specify the mechanism for resolving disputes between owners, specify the forums for resolving such disputes, and indicate the applicable legal system (state or federal) where possible. should be specified in as much detail as possible. Dispose of the company and its assets and distribute the proceeds.

While it is impossible to foresee every issue that will arise over the life of a business, the issues described above occur predictably and regularly, so these fundamental clauses should be included in all business ownership agreements. must be included. In addition to the above, there are many other provisions that can be included in your ownership agreement, depending on the nature of your business and who owns it. It is much easier and cheaper to think about and deal with such things at the formation stage of a business than when a company faces an unexpected crisis.Especially if you have established an entity in the past in your particular industry Business attorneys help owners identify other potential problems and decide how to deal with them should they arise.

remove: Please address the important business decisions above before you start operating your business. When starting a business, everyone is too busy working on the business to take the time and effort to make the decisions that need to be made before the business starts in order to protect the business if any of these issues arise in the future. No tendency. Please address these issues before starting the operation. You will thank yourself in the future when any of these problems arise.

PS It’s never too late to create a custom contract for your business. If you own or operate a business without the owner’s consent, stop now and consult a business attorney before a crisis strikes.