News & Thought Leadership from Sulloway & Hollis
You may be reading this because you are experiencing the break-up of your business, or perhaps it is about to happen. A business break-up or divorce can be as painful and expensive as a personal divorce if at the time of formation and during the operation of the company, such an event is not anticipated and a plan put it place.
When we as lawyers meet with new clients during the start-up phase, everyone is excited and no one wants to think about problems. You may be going into business with your best friend, your co-worker or a member of your family with every intention of having great success and every intention of having the ability to work out all problems that may arise.
However things change, the business suffers, or thrives, people leave for good and bad reasons, people die or become disabled. You may not want to, but you need to think about what you want to do if any of these things happen to you and your company.
Filing formation documents with the state does not complete the formation process, if you are a corporation, you need bylaws and it is a good idea to have Buy-Sell Agreements or Shareholder Agreements. If you form a limited liability company you need a well drafted Operating Agreement.
You need to think about such things as termination of employment, death, disability, transfer restrictions, purchase of the equity of a departing member/shareholder, changes in employment status and changes in the ownership structure of the company. Also, you may want to consider provisions that force the sale of all of the equity, if the majority wants to sell their interests and conversely the right to join in the sale. What process do you want to have for the admission of new members/shareholders?
As with all agreements, each person needs to make sure they fully understand the rights and obligations they assume as part of the company and in many cases each person may need their own lawyer during the formation process.
The temptation is strong to ignore the need to have meetings and maintain records. Every company that has more than one person should meet once a year to review the past year and to vote on issues that will affect the coming year. A record of the meeting can be very informal but should be signed by all members/shareholders. Items such as bonuses can be documented, officers and directors, if you are a corporation can be elected, managers named.
Also, make sure the annual report is filed each year when due.
Having well drafted agreements in place and maintaining complete records does not mean you can avoid issues as your business grows and changes, but when it does, the fact that these steps have been taken will certainly lessen the negative impact when they do.
We would suggest that you work closely with legal counsel skilled in this area of the law when you are starting your company.