Avoiding Pitfalls in Company Governing Documents

July 13th, 2015 - Bryan L. Page

Unfortunately, with business partners, disagreements and disputes happen. You hope to be able to resolve those disputes with your business partners and continue in business to make money. But sometimes people just cannot carry on as business partners any longer. In that case, you hope the decision to split up is mutual and amicable. But sometimes it is not. And that can lead to business partners fighting over a whole bunch of issues. This can happen in any type of business, whether it is a corporation, LLC, or partnership.

When this happens, attorneys helping clients in situations like this first look to the governing documents of the business entity. That could be a partnership or LLC agreement or a shareholder agreement. There are a few provisions that can be included in agreements that make a business split relatively easy or relatively hard. Whenever you start a business entity, it is important to consult with an attorney about these provisions to help avoid nasty, expensive fights later if business partners do decide to part ways.

First, it is a good idea to clearly spell out how voting is to be done. Is each person entitled to one vote? Or is voting done based on the percentage each person owns? Do certain major decisions require unanimous agreement by all owners?

The following are other things to think about including in your business agreements:

  • What happens when one person stops contributing his or her share to the business, or refuses to contribute additional capital when needed, or refuses to co-sign a lease or line of credit?
  • What happens if there is a tie in voting amongst the owners? Is there any tiebreaking mechanism?
  • Are there any buy-sell solutions for various events like the death, disability, or retirement of an owner, or a stalemate in running the business?
  • Are there any provisions for alternative forms of dispute resolution like mediation or arbitration in case a dispute does arise?

Along with many other things, these are all things you should discuss with your attorney when setting up any kind of business with business partners. Spending a little time to clearly spell these issues out at the beginning when everyone is getting along can avoid major hassles down the road in the unfortunate situation when people stop getting along.

Disclaimer: This article and blog are intended to inform the reader of general legal principles applicable to the subject area. They are not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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