Suppose you own a corporation, an LLC, or a partnership with someone else. That creates issues that simply don’t arise with a one-owner business. Planning for those issues avoids unpleasant surprises later. A written agreement memorializes the plan so that no one forgets the terms.
Non-compete: If you want to restrict the ability of owners to leave and participate in a competing business, a written agreement including this topic is essential. Otherwise, there are no limitations in place when a former owner wants to set up or join a competing business.
Issues calling for a supermajority or unanimous approval: For most ordinary business decisions, a simple majority vote works fine. Think about whether the owners want a two-thirds vote, a three-quarters vote, or a unanimous vote for more serious or fundamental decisions. That may include adding a new owner, shutting down, taking out a large loan, etc., but you can tailor that list to the needs of your business.
Death: If an owner dies and there is no written agreement on point, their ownership interest passes to whoever inherits under their will (or by law if they have no will). This could be very bad for the remaining owners. The person who inherits may know nothing about running this business, yet without a written agreement, they will have the same voting rights that the deceased owner had. Common choices for an agreement include: (a) having the company or remaining owners buy out the deceased owner’s interest, so the family gets money but company ownership stays with the ownership group, or (b) the person who inherits gets to receive the same share of profits the deceased owner would have, but they do not have a say in management. If the agreement includes a buyout, consider whether life insurance facilitates payment. Also consider the other payment logistics described in the next section on voluntary withdrawal.
An owner wants to leave: Whether it’s you or another owner, what happens if someone wants to exit the business? A written agreement should governs how this will be handled. If owners wait to discuss this when someone wants out, there are vested interests. The exiting owner wants to be paid more, and paid in a lump sum. The remaining owners want to pay less and pay over time. That usually leads to conflict, and sometimes to litigation. How will the purchase price will be set, e.g., by appraisal or by formula? How will it be paid (at one time, over time without interest, over time with interest, with or without collateral)? It may help to limit when someone can exit (e.g., at the end of each construction project, not for the first year, etc.).
It may seem awkward to talk about some of these issues, but it prevents unpleasant surprises (some of which can occur without anyone being at fault). A well-written agreement among owners now saves time, money, and conflict later. It protects owners from an uncertain or troubling future.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or firstname.lastname@example.org.