on February 16th, 2016
Starting a #new_business is almost always accompanied by exuberance and
optimism. Too often, new partners dedicate all their time and effort developing
business plans, finding capital, and soliciting customers while overlooking important
housekeeping matters that can avoid costly intra-company disputes. Here are
five ways to avoid trouble in paradise.
Have a Written Operating Agreement
Regardless of whether you form an LLC, corporation, partnership or other
entity, the owners should sign an agreement describing how the business will be
managed, how profits will be distributed, and expeditious mechanisms for
resolving disputes if the owners become deadlocked.
By far, the most common causes of disputes in closely-held businesses involve:
(1) who gets to make decisions; (2) how the profits are distributed; and (3)
transfers of interests to third-parties. Addressing these and other issues at
the beginning of the relationship is critical.
Each owner should retain his or
her own attorney to review and negotiate the agreement. Avoid using template
agreements found on the internet or hiring one attorney to draft the agreement
for everyone. Hiring your own lawyer can save a tremendous amount of time and
money if disputes arise later. In fact, most lawyers will avoid representing
all the partners to avoid potential conflicts of interest.
Define How Invested Money Will Be Characterized and
Repaid
Business owners often provide seed money to get their ventures off the
ground. Defining how that money will be treated, i.e., whether it is a capital
contribution or a loan is crucial. If seed money is to be treated as a loan,
having a written promissory note spelling out the interest rate and repayment
terms is hugely beneficial. The owners should also develop rules for raising
additional capital from the owners and for addressing those occasions in which
some owners have the ability to contribute additional capital when others do
not.
Have Transparent Accounting Systems
Distrust between partners is a cancer that has killed too many good
businesses. Problems often arise when one partner feels as if he or she is
being kept in the dark about the company’s finances and operations. Ideally,
each partner should be able to review the company’s bank statements, financial
statements, and accounting systems without having to request that access from
the other owner or owners. This does not mean all owners should have equal
control over the bank accounts or check-writing authority, but there should be
mechanisms in place to assure that all owners know what is happening in real
time or as close to it as possible.
Consider Developing Written Job Duties
Sometimes the partners play an active role in the business and sometimes
they act as “silent” partners. Whether and to what extent an owner is involved
in the company’s day-to-day operations should be spelled out either in the
company’s governing agreement or elsewhere. If an owner is to receive a salary
and benefits in addition to his or her profits interest, the amount of the
salary and benefits should be spelled out in writing and agreed upon at the
outset.
Provide for the Unexpected
Decide how you will handle a buyout of a partner who becomes disabled and
how you will pay the estate of a deceased partner. Investigate approaches to
value your enterprise and select a valuation method that you can memorialize in
the operating agreement. Also, consider having the business purchase life
insurance on the partners as a means of paying the estate of a deceased
partner.
Costly and unpleasant disputes can and do arise in even the best-managed
businesses. However, memorializing the agreement between the partners at the
commencement of the relationship can avoid ambiguities that lead to conflict
and expensive litigation. It is almost always easier to have these negotiations
with your business partners before the venture gets off the ground than
afterwards when the company is operating and making money.
Experienced practitioners can spot unique areas of concern when forming a business
with partners and develop forward-thinking solutions for addressing problems
before they arise.
Do not be penny-wise and pound foolish when starting a new
business. Litigation can be costly in “corporate divorces” if the partners fail
to document their agreements clearly at the beginning of their relationship.
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