It’s cheaper and easier to plan how to deal with trouble than it is to get out of trouble. This is a maxim that holds true throughout our personal and business lives. And from a legal perspective it is especially true when considering going into business with one or more partners, when bringing on investors and in conducting general business planning.
Choosing partners, identifying potential investors and setting business terms are very important aspects of these business relationships. But choosing to go into business with someone includes far more than simply setting a buy-in or contribution amount. Prospective business partners, and owners contemplating bringing on investors, need to go through a proactive legal planning process designed to establish long-term partnership goals and terms, assessing risks and rewards, and taking into account the potential for growth, deadlock and dispute.
Take the classic example of a business owned equally by two parties. You decide to go into business together and are excited about the potential to make money. How are you going to handle decision-making? Who will serve in what role for the company? Does each have equal say in the operation of the business? If so, how will you handle deadlocks on key issues. How will you handle trust disputes?
In a 50/50 business, as well as in other ownership structures, a deadlock can lead to an all-out owner dispute that threatens the operation and existence of the business. At the outset of the relationship, therefore, the owners need to consider and adopt a strategy and platform that will accommodate and resolve disputes without dissolving the entity.
Exit strategies, minority owner protections, owner non-competes and non-solicits, compensation terms, and planning for the disability, death or other inability of an owner to participate in the ongoing business as initially expected are merely a few of the important decisions that need to be incorporated into a comprehensive owners’ agreement at the outset of the relationship. This type of contract can certainly be accomplished at a later time, but the sooner the better. For an LLC, this is typically the Operating Agreement. For a corporation, consider adopting a Shareholder Buy-Sell Agreement that address these issues.
Take the time and spend the money to have an attorney help you address key issues, risks and potential hurdles that your partnership relationship will need to be able to address. Failure to do so leaves the parties guessing if a dispute arises, in turn leading to arguments, disputes and attorneys’ fees to settle the dispute. And while even the most comprehensive and thoughtful planning won’t be able to address all issues, the absence of planning is far more likely to lead to added costs, turmoil and risks to the business.
The information herein is not legal advice and does not create an attorney/client relationship. The information is in the form of legal education and is intended to provide general information about the matter. The above is not, nor is it intended to be, legal advice. Consult your attorney with questions.