Agreement Among Business Owners Must be in Writing

agreement among business owners

Get it in Writing!!

agreement among business owners

It is probably obvious to business owners that the terms of the agreement among business owners should be in writing.  This really should be done when the business is started and everyone is excited about the business and all are in agreement with how the business will be operated and other important terms of the relationship among the owners.  The sad truth is that too often business owners do not put their agreement in writing.  Business owners may feel it is an unnecessary expense, because, “after all, they are best of friends.”  Why spend the money having an attorney draft an agreement among business owners when the business owners would prefer to put the money into the business?  Actually, it really is not that expensive to engage an attorney to draft the agreement among business owners.  It certainly is a lot less expensive than the legal fees that the parties will have no choice to pay if there are disagreements and no contract to provide guidance on what happens when such disagreements occur.

Another mistake business owners make is using a “fill-in-the-blanks form” they find on the Internet.  The problem with these forms is that they are not drafted with the understanding of the business and the owners involved that an attorney will have.  As a result, there will be situations that are either not addressed or are addressed in the wrong way.  An experienced business attorney will know the questions to ask so that the agreement among business owners is uniquely tailored to the owners and their business and protects the business and the owners.

If you are a business owner with other co-owners and you do not currently have an agreement among the owners, run, don’t walk, and find a business attorney to draft an agreement that covers the typical provisions in an agreement among business owners.  You will be groaning and kicking yourself if something goes wrong and you do not have an appropriate agreement.

What Should Be Included in the Agreement Among Business Owners?

If the business is a corporation, there should be a shareholders’ agreement among the owners.  If the company has both common stock and preferred stock, additional agreements will be required.  If the business is a limited liability company, there should be an operating agreement.  The contracts should cover the same basic terms with respect to how the business is to be run and how the relationship will work among the owners.  These are some of the most important terms that should be addressed in the agreement among business owners, though depending on the business and the owners, additional provisions will likely be required:

  • Ownership Split:

    This will either be covered by the number of shares held by each shareholder, in the case of a corporation, or in the case of a limited liability company, the ownership will be reflected in the capital account of each owner.  There are other potential provisions that could affect ownership percentage.  In a corporation, is there a stock option plan?  If so, how are options granted and how do they vest?  How are the decisions on options to be made?  The vesting of options may affect ownership percentage.  If the business is a limited liability company, will there be required capital calls, so that each owner will be responsible for contributing additional capital?  What happens if one or more owners does not make a required capital call?

  • Management and Approval Rights:

    The agreement among business owners must address how decisions are to be made with respect to the company.  A business attorney can help you decide which decisions can be made by officers and which decisions must require approval by the Board of Directors.  When business issues require Board approval, you must also decide whether a simple majority will suffice, or whether some issues will require a supermajority vote.

  • Buy-Sell Provision:

    It is extremely important that the agreement among business owners contains a buy-sell provision.  A buy-sell provision will state what happens in the event something happens to one of the owners (i.e. death) or if one of the owners wants to sell their interest in the business.  A business owner usually does not want to be in the position of having a spouse as his partner, so make sure your agreement contains a buy-sell clause.  You will also need to ensure that the company has the funds to buy the interest of an owner that is either selling their interest or to pay the spouse for the ownership interest of a deceased owner.  KHNETIC Legal can assist you in obtaining proper insurance to cover this expense.

  • Restrictions on Transfer:

    The agreement among business owners should restrict transfer on ownership interests.  The owners may be very unhappy if one of them transfers their interest to a party that does not fit in with the culture of the business, is not qualified, or they do not get along.  You can talk to your business lawyer about including a provision that would allow an owner to sell her or his interest, if the company is given the right of first refusal to buy the interest at the same price and on the same terms, and if the company declines, the other owners are given such right of first refusal.

  • Distributions/Salary:

    The agreement among business owners should address how funds/net profits are to be distributed.  There are tax considerations involved, so an accountant should also be consulted.  There may be a point where the company is very successful, that it makes economic sense to take profits out as a reasonable salary, and some profits are distributions or dividends.  This can help to limit self-employment taxes.

  • Third-Party Offer to Invest:

    This situation should be covered at the outset by the agreement among business owners.  In most situations, the owners are going to desire that the agreement requires unanimous consent before any third-party is permitted to invest in the company and take a piece of the equity.

  • Right of First Offer on Future Issuances:

    The agreement among business owners should provide that in the event the company has the right to offer or sell additional securities, the existing owners have the right of first refusal to purchase such additional securities to maintain their respective ownership percentage in the company.

There are other provisions that may be applicable to the agreement among business owners and it is critical that you consult with a business attorney to ensure you have all your bases covered and can hopefully avoid misunderstandings and disputes as your business grows.

Contact KHNETIC Legal today to assist you in drafting an agreement among owners that will assist you in growing your company.

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