Doc of the Day: Key Issues Closely-Held Business Owners Should Have in Writing…

…the agreement should be discussed and executed when commencing the business relationship, because many individuals tend to overlook or downplay the real possibility of potential conflicts and problems that may arise in the future.

Here’s an excellent piece by David Hanley, a Florida-based business and estate planning attorney. Hanley’s primer “provides answers to such questions as: Why should the parties execute a binding legal agreement? What issues relating to the ownership and control of the company should be included in such agreements? When should the agreement be discussed and executed?”

Highlights»

“Whenever two or more friends, family members, or other individuals come together to form a closely-held business entity, whether to start a new business, invest in real estate, or some other purpose, the parties should execute a binding legal agreement amongst themselves and the company to address a variety of issues relating to the ownership and control of the company. The agreement should be discussed and executed when commencing the business relationship, because many individuals tend to overlook or downplay the real possibility of potential conflicts and problems that may arise in the future.

Ownership and Interest Control

The Agreement should clearly document each owner’s respective interest in the entity, whether the entity is organized as an S corporation, a limited liability company or a partnership.

The agreement should also contain specific provisions addressing who will manage, operate, and control the company.

…the agreement often provides that major business decisions, such as the decisions to acquire a new business, sell substantially all the assets of the company, or to enter into loan agreements, will require a majority or a supermajority (i.e., something more than 51%) of the owners to approve before such action may be taken.

Restrictions on the Transfer of Ownership Interest

A provision restricting the transfer of an owner’s stock or other interest in the company is necessary to eliminate the possibility of the owner transferring his or her interest to an outsider. In a typical agreement, the provision restricting the transfer of an owner’s interest may require the consent of all other owners of the business prior to the proposed transferee being recognized as a substituted owner, as the new proposed owner may not have the necessary skill to be involved in the business or may not be compatible with the existing owners.

Buyout Provision for Deceased Owner

It is not unusual for disputes to arise upon the death of an owner, which could be prevented by including a buyout provision in the agreement. When an owner dies, his interest normally passes to the beneficiaries of his estate. An individual receiving an ownership interest in this manner may decide to keep the interest and become involved in company’s business affairs, keep the interest but remain uninvolved in the business, or transfer the interest to a third party.

Mandatory Buy/Sell Provision

When two or more owners each own fifty percent (50%) of a company, a mandatory “buy/sell” provision can be very useful, particularly in the event of a deadlock or other situation where the parties cannot agree and the business of the company is impacted. Such a provision allows one owner to give the other owner a buyout offer at any time. The recipient of the offer must either accept the offer and be bought out, or conversely, purchase the interest of the first owner on the same terms and conditions as the first owner’s offer…

Read the entire article: Key Issues Closely-Held Business Owners Should Have In Writing | David F. Hanley