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The Importance of the Owners’ Agreement in Business Formation

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As highlighted by a recent Forbes article, running a business unfortunately sometimes involves disputes and conflicts. Whether it involves a breach of contract claim, property rights, unfair trade practices, or something else, there really is no excuse for failing to ensure that you have every legal control possible in place at the outset.

With the assistance of an experienced business litigation attorney, you can help predict any bumps in the road and try to ensure that there is a sound course of action if a conflict arises. For example, coming up with a well-crafted owners’ agreement can help establish a binding process for resolving conflict.

The Problem

Many businesses involve two or more owners because getting a business off the ground requires significant investment and a variety of skills. And yet, how you set up the business is absolutely paramount to the business itself and the relationship between those business owners. Often, an attorney may use a generic owners’ agreement that only covers certain basics about the business (such as the percentages of ownership, how the business will be managed, etc.)  but doesn’t address what to do if the owners start to disagree and/or want or need to go their separate ways.

The Role of the Owners’ Agreement

An owners’ agreement—and any other contract, for that matter—can actually do and address whatever you need it to as long as it’s legal. Thus, common issues that should be included  in an owners’ agreement address:

  • Which activities require a vote by the owners to approve;
  • What happens if one owner wants to sell his or her interest in the company;
  • What happens if one owner becomes incapacitated;
  • What happens if one owner’s equity interest becomes subject to creditor claims if that owner files for bankruptcy;
  • Whether there are going to be any limitations placed on the owners’ ability to pledge their equity interests as collateral for loans;
  • Whether the company can employ an equity owner;
  • If the company can employ an equity owner, what happens if they are fired;
  • Whether there any circumstances that would cause an owner to have to involuntarily sell their interest in the company, and if so, what those circumstances are;
  • How any equity interests being sold will be valued; and
  • What percentage of the equity ownership must vote to approve certain decisions, such as dissolving the company, approving a distribution of profits to the owners, selling the company’s assets, etc.

Sarasota Business Litigation & Transaction Attorneys Can Help

If conflict arises and the owners’ agreement does not provide for any procedures to address the situation, most business owners are left with no choice but to potentially commence expensive litigation. This is why it is important to work with an experienced business litigation attorney as the business is forming so as to ensure that everything is planned for–including a potential breakup—and an agreement that is specifically tailored to the business’ and owners’ needs (instead of being simply generic) is established.

The experienced Sarasota business litigation attorneys of Moran, Sanchy & Associates can help. Contact our offices to today to find out how we help businesses plan for the future and how we can help you.

Resource:

forbes.com/sites/groupthink/2017/07/18/breaking-up-is-hard-to-do-even-in-business/#166e1018d0ec