10 Things About Owners Agreements

  1. Unless You’re Microsoft, You Need an Owners Agreement.  Having an Owners Agreement is important for every non-public company with more than one owner.  Owners Agreements go by different names—Shareholders Agreement or Buy-Sell Agreement for a corporation, Operating Agreement for an LLC, Partnership Agreement for a partnership.  Whatever it’s called, it’s essential.
  2. “We Already Have Bylaws.”  Great, but they are not the same thing.  Bylaws deal with the internal management of a corporation and the relationship between shareholders, directors, and officers.  Owners Agreements have a different focus: the relationship among shareholders.  The Owners Agreement is much more important for a non-public corporation.  LLCs and partnerships don’t even have Bylaws.
  3. Protection From Unknown Unknowns.  What happens to the business when personal tragedy strikes one of its owners?  Personal liability, bankruptcy, divorce, disability, death—any one of these events in the life of an actively involved owner can cripple the business, unless precautions are taken in advance.  Those precautions belong in an Owners Agreement.
  4. Know Your Partners.  You trust your business partners, but how about their creditors or ex-spouses?  An Owners Agreement is needed to ensure that the ownership interests (stock, membership units, partnership interests, whatever they’re called) do not wind up in the wrong hands.
  5. Deadlock!  You and your business partners are reasonable people, but sooner or later even reasonable people disagree.  This isn’t a problem for the U.S. government or large corporations—where the voting process (usually) ensures a winner—but what if there are only two owners of the company (or 4 or 6 or 8, etc.)?  The Owners Agreement can include more creative solutions to deal with deadlocks.
  6. Competition—Good for the Market, Bad for your Business.  Having put time and resources into building the business, the last thing you want is for your business partner to compete against the business.  On the other hand, you might not care if your business partner has a side business.  Extracurricular business activities what’s allowed and what’s not should be addressed in the Owners Agreement.
  7. Like Old Fish.  If an employee-owner quits or is fired, the last thing anyone needs is for her to hang around.  If she keeps her ownership interest in the company, that’s exactly what can happen.  The Owners Agreement should require a buy-out.
  8. Not the Time for Haggling.  The Owners Agreement should address the purchase price and payment terms for the buy-out of an owner’s interest, whatever the triggering event.  Unless you keep loads of cash lying around—“just in case”—you or your business might suffer from an unexpected obligation (or opportunity) to cash out an owner.  By the way, how much is that ownership interest worth anyways? 
  9. Bells and Whistles.  Sometimes the cookie-cutter, default rules of a corporation are just fine, but often you and your business partners want things your way.  LLCs or partnerships are especially flexible and allow customization.  All this customization must be provided in the Owners Agreement.
  10. They Grow Up So Fast.  As your company grows, your Owners Agreement may not fit so well (like my children’s clothes).  Every few years, it’s important to review and update the Owners Agreement to make sure that it continues to fit your company.

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