Q: I want to start a business with a partner, is there anything I should do to protect myself and the business?
A: There are numerous advantages to starting a business with a business partner. However, there are a few fundamental items that business partners should consider before starting the business.
In all but a very few cases, you should form an entity through which you will run the business. Limited liability companies (“LLC’s”) are by far the most common entity formed for most small businesses, but in some cases, corporations are still used. You should determine the form of entity you will use, and how the entity and its partners will be taxed. You and your partner should consult with a competent business attorney and accountant to address this important preliminary step.
Business partners should agree on the voting and governance structure. Usually, the partner investing the largest amount will have more voting power. The majority partner will, in most cases, control the vote of the members/shareholders. In some cases, business partners have equal votes. That may set up a scenario where the partners cannot agree on a fundamental course of action. The company may be “stuck.” In that case, how will a deadlock between the partners be resolved?
Who will have the right to manage the day to day affairs of the company? Business partners should have a document in place that clarifies the authority for day to day management of the business, the matters that will require a vote of the mangers or board of directors, and the matters that will require a vote of the members or the shareholders. For an LLC, this will likely documented in the company’s LLC operating agreement, and for a corporation, this can be documented in the company’s bylaws, or in a shareholder agreement. It is important to have clarity as to who has the authority to manage, operate and bind the company, and the processes for resolving disagreements between business partners on matters where the decision makers deadlock.
Second, the business partners should agree on what happens to their ownership in the company upon the occurrence of certain life events. These life events may include the death, disability, withdrawal or divorce of a business partner. For example, upon the death of a business partner, does the company and/or the other business owner want the option or obligation to purchase the deceased business partner’s ownership of the company? Or if one business partner becomes disabled, wants to withdraw, or is divorced, does the other business partner want the option to buy that partner out of the company? These items are often addressed in the operating agreement or a member agreement of a LLC, or a shareholder agreement or a buy/sell agreement of a corporation. Ownership of a company is treated like any other asset of a business owner upon their death or divorce. If one of these agreements between is not in place, the surviving business partner may be stuck with a new business partner they did not want.
Consult with a competent business lawyer to address these important matters.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.