Disputes among business partners are common. Some can be resolved amicably, but there are times when a dispute can become disastrous for the business. Having a plan for resolving the inevitable disagreements can help the business move forward more easily and can relieve some of the tension among the partners. Such a plan should include provisions for how decisions will be made when the parties cannot agree, terms for the buyout of a partner, and provisions for a dissolution of the company under certain conditions. All of this can be accomplished when the business is first organized by preparing the appropriate documents and agreements.
Regardless of whether the company is a corporation or a limited liability company, it should adopt bylaws (corporation) or an operating agreement (LLC) and a buy-sell agreement.
The bylaws or operating agreement establish the general terms of how the company will carry out its business, how the company is structured, and how decisions are made. While there are standard provisions that most companies adopt, the terms can (and should) be specifically tailored to the business and the owners’ preferences. Some of the important terms to consider include which decisions require unanimous consent or some other percentage of approval, how deadlocks will be resolved, and whether there are any limits on who can enter into contracts and incur expenses on behalf of the company.
A buy-sell agreement establishes the terms on which an owner can transfer his or her shares. The agreement should provide the right for remaining shareholders to buy the shares, the manner of valuing the shares, and how and when the shares will be purchased. This type of agreement helps ensure an efficient transition when a shareholder wants out of the company, dies, or is required to give up his or her shares due to a triggering event. Examples of common triggering events are filing bankruptcy or engaging in conduct detrimental to the company.
If you have questions about business planning or disputes that have arisen within your company, always feel free to each out to us.