These 10 points will help you build a Board that can take your company to the next level. Representative Democracy. The primary purpose of the Board of Directors is to represent the shareholders, to protect their investments, and to ensure that they receive an adequate return. Directors are elected by the shareholders to serve terms of one or more years, concurrently or staggered, as provided in the Bylaws. The Big Picture. The Board of Directors is the highest governing authority in a company. It is generally the Board’s job to hire, oversee and approve compensation for the Chief Executive Officer and other executives, to approve payment of dividends, and to recommend for or against major transactions affecting the shareholders. One Director, One Vote. Actions and decisions of the Board of Directors generally require the vote of a majority of the directors. The Bylaws might require a supermajority or unanimous approval for certain decisions. The Board may hold live or telephonic meetings (at which minutes must be kept), or they may sign written resolutions in lieu of a meeting. Caring Souls. Directors owe a duty of care to the company and shareholders. They must act in an informed and deliberate manner. Directors should have a good working knowledge of the business, its plans, and potential problems. The Board should avoid not only haste but the appearance of haste. Trust But Verify. In exercising their duty of care, directors may rely on information and advice provided by company executives, managers, and employee, as well as outside experts, such as attorneys, CPAs, and investment bankers. But directors should actively question and test the information and advice they receive. Always Be True. Directors also owe a duty of loyalty to the company and shareholders. They must make decisions based on the best interests of the company, and not any personal interest. Directors must first offer to the company any opportunity to that is related to the business of the company. Cured. A director has a conflict of interest when he or she has a personal interest in a transaction to be approved by the Board. The conflict may be “cured,” and the transaction upheld, provided the conflict is known to the disinterested directors of shareholders who approve the transaction. Inside Out. Directors who are also employed by the company are known as “inside directors,” while independent directors are known as “outside directors.” In some sense, inside directors always have a conflict of interest (their paychecks). For this reason, it’s good practice for the Board to have a majority of outside directors (this is generally a requirement for publicly traded companies). Committee Time. Especially when the Board of Directors has a large number of members, it is often more effective for directors to act and make decisions in committees made up of a small number of directors. Committees are created to focus on specific topics, like executive compensation or finances. A committee of independent directors can be used to approve decisions for which inside directors have a conflict. Personal Judgment. Directors are not personally liable for losses suffered by the company or the shareholders, provided they have met their duties of care and loyalty. Even if the directors’ decisions turn out to be unsuccessful or unwise, the directors are generally protected under the so-called business judgment rule.
What you need to know before including stock options in your employee incentive program. A Range of Options. Stock options are just one form of employee incentive, all of which are intended to encourage key employees to make the company successful. In evaluating the alternatives, there are two important questions: What will incentivize the employees? How much ownership should the employees have? Don’t Believe the Tax-Free Hype. Incentive stock options (ISOs) are popular because they are believed to be tax-free for the employees. They’re not, in most cases. When ISOs are exercised, the “spread” (the difference between the exercise price and the fair market value of the stock) may not be subject to ordinary income tax, but it is subject to the alternative minimum tax (AMT). Also, when the stock is sold, the employee must pay capital gain taxes on the difference between the exercise price and the sale price. Through the ISO Hoops. To avoid ordinary income tax on the grant and exercise of ISOs, specific requirements must be met. At the time ISOs are granted, the exercise price cannot be less than the stock fair market value. ISOs must be exercised within ten years of being granted. After exercise, the option stock cannot be sold until two years after the date the option was granted and one year after the date the option was exercised. The Trigger Trap. Often the event that triggers the exercise of ISOs is a sale of the company. But exercise-and-sale as part of a company sale means that the employee cannot satisfy the two-year-from-grant and one-year-from-exercise holding requirements. As a result, the employee must pay ordinary income taxes on the difference between the option exercise price and the stock sale price. Plain Vanilla Options. Options that are not intended as ISOs are called non-statutory options (NSOs). Generally, the employee pays ordinary income taxes on the value of the options at the time they are granted, and the employer gets an immediate deduction for the same amount. There is no required time limit on when NSOs can be exercised, and there are no holding requirements. Restrictions May Apply. An alternative to options is restricted stock. Key employees are given company stock directly, but there are restrictions on voting rights, sharing in profits, or whatever the employer decides. However, the tax laws applicable to S corporations only permit restrictions on voting. Like NSOs, the employee generally pays ordinary income taxes on the value of the restricted stock at the time it is granted, and the employer gets a deduction. Tax Timing. Ordinary income taxes on NSOs and restricted stock can be delayed if they are subject to substantial risk of forfeiture. For example, restricted stock may be forfeited if the employee’s employment is terminated. The restricted stock would not be taxed until it becomes vested. However, the employee might choose to pay the tax early, by making an 83(b) election, if the stock is expected to go up in value. Real, Live Stockholders. Employees who exercise options or receive restricted stock are real stockholders. They are entitled to view the company books, to vote on directors and significant transactions, and they are owed fiduciary duties. The employer can impose some restrictions, but some stockholder rights by law cannot be limited. A Ghostly Alternative. Another alternative is “phantom stock.” Phantom stock is not actually stock at all. Instead, it is a promise to pay bonuses based on increases in the value of the company stock. Phantom stock avoids the complexity of ISOs and the stockholder rights of options and restricted stock. On the other hand, phantom stock may not incentivize employees as much as would stock ownership. If the name phantom stock isn’t scary enough, they’re also called stock appreciation rights (SARs).
Before you sell stock in your company, understand these 10 issues: The Other SEC. Whatever you call it—stock, units, interests—outside investment in a business is a security. The sale of any security is regulated by Federal and state law. This doesn’t mean that you have to “go public” through an IPO just to sell your stock, but it does mean that you have to worry about securities regulations. Ignore them and you might face civil or criminal penalties. Compliance Made Easy. The sale of stock does not require full-blown (read: costly) registration with the SEC if you comply with one of the private placement exemptions. These exemptions put limits on the total offering price, the offering duration, the number of investors, and/or the information required to be given to prospective investors. For each of the exemptions, no general solicitation or advertising is allowed. The In Crowd. It’s always a good idea to limit the offering of stock to “accredited investors.” Accredited investors can presumably take care of themselves because of their net worth (at least $1 million for an individual) or their annual net income (at least $200,000). How do you know if someone is an accredited investor? You ask, usually by having prospective investors fill out a questionnaire. Stick to the Script. At the heart of securities regulations is concern over what promises are made to potential investors. It’s important that your sales pitch is in writing, which is often called a private placement memorandum (PPM). The PPM includes all of the good and bad information about the stock being sold. What’s the Plan? Your PPM should go into as much detail as possible about the company’s plans for using funds raised from the sale of its stock. This is important from a marketing standpoint (no one will give you money without a good plan), and it is also important for full disclosure. To provide some comfort for the initial investors, PPM’s will often state a minimum amount that must be sold, or else their investments will be returned. Bespeak Caution. An important part of the PPM is the Statement of Risk Factors. This is everything that could go wrong with the investment. Since you’ll want your business plan to be as glowing as possible (you’re trying to make a sale remember), the Statement of Risk Factors is an essential dose of reality. If an investor later complains about the investment, you can point to the Statement of Risk Factors. Widgets for Sale. Your stock is a product, and your goal is to sell it. You need to design that product with care. Is the stock voting or non-voting? What rights will the investor have to distributions? What rights will the investor have upon the sale or liquidation of the company? The design of the stock is in the Owners’ Agreement, which can include different designs for a number of classes of stock. Me First. A common design element for stock offered for sale is a preferential return. Investors want to know that their dollars aren’t going straight into your pocket. One way to assure them is to promise that they get first dibs on the company’s profits, either from operations, the sale of the company, or both. Stock with these rights is often called preferred stock. Be careful: It’s a no-no for S corporations. Me Too. Another concern of many investors is that soon after they buy their stock, the company will sell new, improved stock (with better preference rights, for instance) or sell the same stock cheaper. To deal with these concerns, you might include preemptive rights in the offered stock. Preemptive rights allow the stockholders first dibs on any new classes of stock the company sells in the future. Pace Yourself. Don’t sell more stock than is absolutely necessary. Each time you sell new stock, you have to give away more of the company profits and/or control of the company. If you give away too much in the early rounds, you won’t have anything left when you need it. Venture capitalists, especially, demand a lot.
Buy-Sell Agreements go by different names (Shareholders Agreement, Operating Agreement, Partnership Agreement, for example), but they all have a common goal: provide a clear roadmap for the company and owners to deal with changes in ownership, with minimal impact on the operation and value of the business. Bad Buy-Sell Agreements—those that do not minimize the impact of a change in ownership—share one or more of the following three mistakes. Mistake #1: Cookie-cutter terms that just don’t work. It’s a mistake to think that a generic Buy-Sell Agreement is just fine for every company. The terms of a Buy-Sell Agreement must fit the unique characteristics of the company. These unique characteristics may include unequal ownership interests, differing roles in the company, particular family relationships among owners, and industry-specific requirements. Unless the Buy-Sell Agreement takes into account all of the particular aspects of the company and its business, it’s likely that the Buy-Sell Agreement will fail when it is most needed. The Solution: Every Buy-Sell Agreement must be carefully prepared to reflect the unique characteristics of the company and its owners, and it should be regularly reviewed and updated. Mistake #2: Determination of the buy-out price is unreliable. Because Buy-Sell Agreements are about the buying and selling of the company’s ownership interests (stock, membership units, partnership interests, etc.), price matters. If a fixed price set in the Buy-Sell Agreement is too low, then the selling owner (or his or her family) suffers. If a fixed price set in the Buy-Sell Agreement is too high, then the buying owners or the company suffers. For this reason, it’s a mistake for the Buy-Sell Agreement to state a fixed price for the company’s ownership interest, unless the parties are required to update the price regularly. It may be better for the Buy-Sell Agreement to contain a formula to determine the appropriate price, but even a formula can lead to problems if it depends on wrong or outdated presumptions. Because of the problems associated with stating a fixed price or a formula, many Buy-Sell Agreements require an appraisal at the time of a transfer of ownership interests. An appraisal approach might be better, but it too can suffer from problems, such as failure to specify what facts the appraisal should take into account or gaps in the procedure for determining the price by appraisal. The Solution: Whether a fixed price, formula, or appraisal, the price provision of every Buy-Sell Agreement must accurately reflect the specific nature of the company and it must be flexible and subject to periodic update. Mistake #3: No assurance that cash will be available to pay the buy-out price. Even if a buy-out price is determine appropriately, the buyer—the other owners or the company—must have the ability to pay it. Unless the Buy-Sell Agreement provides specific terms for the timing and source of paying the buy-out price, the buying owners or the company may be legally obligated to pay the whole amount immediately from operating funds. This debt obligation could cripple the company or the remaining owners. The Solution: Every Buy-Sell Agreement should specify the intended source of funds for paying the buy-out price—often including life insurance and disability insurance policies—and a reasonable time period for payment of any unreserved amount. Common Elements of a Good Buy-Sell Agreement Buy-Sell Agreements should be unique documents, reflecting the particular characteristics of the company and its owners, but good Buy-Sell Agreements share most of the following common elements. Good Buy-Sell Agreements: Prohibit transfer of ownership interests except as specifically provided; Deal with the transfer of ownership interests in the following scenarios: voluntary transfer by an owner; involuntary transfer by an owner (caused by divorce, bankruptcy, or creditor action, etc.); death of an owner; disability of an owner; termination of employment of an owner; and irreconcilable deadlock among owners; Spell out the procedure by which buy-out may occur in each scenario; Describe the method of determining the appropriate buy-out price; Describe the source of funds for payment of the buy-out price (e.g., insurance); Describe payment terms; and Describe what should happen pending buy-out. Most important of all, no Buy-Sell Agreement is a good Buy-Sell Agreement unless it is signed by all of the owners, including persons who become owners after the Buy-Sell Agreement is originally signed. Do you have a good Buy-Sell Agreement? If you’re not absolutely sure, contact BrewerLong to have your Buy-Sell Agreement reviewed by an experienced small business attorney.
Selling a business can be lucrative but it’s complicated. Consider these points and contact a business lawyer for help today. 1. What are You Selling? Early in the negotiations, buyer and seller must agree on what is being bought and sold—company stock (or other equity interests) or business assets. Ordinarily, the seller would prefer to sell the company stock, because that will make unknown company liabilities the buyer’s problem (subject to seller’s indemnification commitment). However, the seller might favor a sale of business assets because getting the cooperation of all the stockholders and option holders might be difficult. 2. Don’t be Coy Be open and honest in responding to the buyer’s due diligence investigation requests. Every company has taken shortcuts along the way which it might not want to disclose, but the consequences for misleading a buyer are much worse. Expect to put a lot of time and work into responding to due diligence, have a good Non-Disclosure Agreement, and let the buyer have at it. 3. The Straight and Narrow Avoid general, open-ended representations and warranties in the sale agreement. Certainly, there are some issues for which seller “should know,” and reps about these issues are just about risk allocation. But whenever you can get away with it, the seller should keep its reps and warranties as narrow and focused as possible. “To seller’s best knowledge” is a welcome (if rarely accepted) qualifier. 4. Run Out the Clock The seller should expect to indemnify the buyer for costs or losses resulting from the inaccuracy of seller’s reps and warranties. However, the obligation to indemnify the buyer should not go on forever. The seller should limit the time period for its indemnification as much as possible. Often, different indemnification periods will be appropriate for different potential liabilities. 5. Taxes as Usual Sale of the business will likely result in a lot of taxes. There’s capital gains tax on the sale of the stock or business assets, which could be quite high if basis is low. The seller is responsible for his or her own capital gains taxes, but responsibility for other taxes is negotiable. The seller and buyer should agree on responsibility for sales taxes, documentary stamp taxes, or intangibles taxes, if they apply. 6. Delayed Gratification The seller would probably love nothing more than getting a big check at the closing table, but the buyer might insist on holding back part of the purchase price. This might be because an accurate value for the business cannot be determined until all the numbers are in for a given period. Holdbacks are sometimes reasonable, but the seller should insist that the money is placed with an impartial escrow agent. 7. Something for Nothing Remember how happy your employees were when they got those stock options? Don’t expect them to remember now. Unless they’ve completed the “incentive stock option maneuver” perfectly, your employees are going to have a big tax bill on the exercise and sale or redemption of their option stock. And they won’t be happy if they have to wait on a holdback either. 8. Unbind the Ties Most business owners, when the business is growing, are required to personally guaranty every bank loan, trade credit, and other obligation of the business. The seller must be sure to negotiate a release of all of those personal guaranties as part of the sale. If a creditor refuses to release the seller, the buyer should at least indemnify the seller for liability resulting from the personal guaranty. 9. Trust But Verify Often buyers will want to pay part of the purchase price in installments over a period of time. Now the seller needs to be the cautious trader. The seller must conduct its own due diligence investigation of buyer’s ability to pay. The buyer’s obligation should be documented in a promissory note (on which doc stamp taxes are paid) and secured by the purchased stock or assets. 10. A New Hat Buyers often insist on the seller continuing to work or consult for the business for a period of time. This requires a separate agreement between the buyer and seller, which should be fully negotiated and documented at the time of closing on the sale. Especially watch out for non-competition restrictions.
Ready to hire? Keep these ten points in mind before you begin the Florida background check process: 1. Brushes with the Law An employer who obtains a satisfactory criminal history check on a job applicant is presumed to not have liability if the person later commits an intentional tort (a civil wrong that causes someone else to suffer loss or harm resulting in legal liability for the person who commits the tortious act). Criminal history record checks may be obtained from each county in Florida and from the Florida Department of Law Enforcement. Separately, employers can also check a job applicant’s name against the outstanding warrants and sexual offender databases. 2. Spanning the Twitterverse Facebook, LinkedIn, Twitter and other social media sites may provide a trove of information about job applicants. There’s no law against searching social media sites. However, these sites are likely to contain information—race, religion, sex, marital status, etc.—which cannot be grounds for non-hiring for many employers. 3. Sue Happy An employee who is involved in numerous civil lawsuits may not be ideally suited for the job. Employers may check the civil court records of each county in Florida to determine whether a job applicant has sued or been sued in civil court. 4. Credit Checks in the Red Federal law requires employers to obtain written consent before obtaining a job applicant’s credit report. If the employer decides not to hire the person based in part on the credit report, he or she must be provided with a copy of the report. 5. Making the Grade Federal and Florida laws make student education records confidential. However, employers can require job applicants to provide school transcripts or verification of enrollment. Degree or enrollment verification is available through most schools or third-party providers like National Student Clearinghouse. Do you need help conducting an employee background check? Get in touch with our employment lawyers by filling out the form below. 6. It Stays in the Exam Room Medical records are generally confidential under both federal and Florida law.Employers can ask applicants questions about their ability to perform specific job duties, but employers cannot ask for medical records. 7. Right to be Bankrupt Bankruptcy records are a matter of public records, so it is possible for employers to determine whether a job applicant has declared bankruptcy. However, federal law prohibits most employers from discriminating against an applicant because he or she filed for bankruptcy. 8. Got Hurt and Can’t Work Employers should be concerned about abusive workers’ compensation claims, which can increase employers’ insurance premiums. Workers’ compensation claims are public records in Florida. Employers that obtain the necessary release form can search for job applicants on the Division of Workers’ Compensation Claims Database. 9. License to Drive When job duties involve driving, Florida employers should require job applicants to provide written consent allowing the employer to obtain the applicant’s driving record. Without consent from the applicant, an employer may only obtain a driving record to verify information provided by the applicant. 10. Cannot Tell a Lie In most cases, federal law prohibits asking job applicants to submit to a lie detector (polygraph) test. There are a few exceptions when hiring for specific positions, such as armored car drivers and pharmaceutical distributors. Have A Question About Florida Background Checks for Employment? Contact BrewerLong today and our employment attorneys can advise you how to carry out a background check.
A personal guaranty is a legal promise that, if a business is unable to repay debt, an individual will assume responsibility. Credit issuers use personal guaranties to ensure repayment of the loans they issue to businesses. Some creditors will not even consider giving out a business loan without a personal guaranty. For many small businesses, the creditor is the gatekeeper, and the personal guaranty is the key to the gate. Before signing for a business loan, it is essential to know how creditors enforce personal guaranties. Before you sign, know these 10 facts about personal guaranties: This Time, It’s Personal. A personal guaranty is a promise to be personally responsible for the obligation of another person or company. The person or company to whom the obligation is owed—usually a lender—can enforce the obligation against the guarantor just like the original obligor. Would You Loan Money to a Teenager? No, neither would a bank. Unfortunately, banks look at your new business and see a teenager. Lenders want an “adult” to co-sign for their loan—often the owners of the company. Keys to the Gate. If the limited liability aspect of your corporation, LLC, or LLP is a wall between your business activities and your personal wealth, a personal guaranty is the key to the gate. Personal guaranties make sure that you are “all in.” Good for the lender, bad for entrepreneurs looking for a fresh start. It’s Your Problem. Banks often require a number of people to personally guaranty the same obligation. These guaranties are usually “joint and several,” meaning that the bank can enforce payment of the whole amount against one of the guarantors. It’s up to that poor guarantor to go after reimbursement from the other guarantors. Ties that Bind. You can dissolve your marriage or your business partnership, but that has no impact on the personal guaranties made by the parties. As a result, you may still be responsible for your ex-spouse’s or your ex-partner’s debt. You can ask the lender to release the personal guaranty, but it’s not likely to happen. Changes. Often, a change in the circumstances of a guarantor triggers a default under the obligation. So if the uncle who guarantied your loan dies, becomes disabled, or files for bankruptcy, you could get a demand for full payment from the lender. Beyond the Grave. Personal guaranties survive the death of the guarantor. This means that, after the death of the guarantor, the guarantor’s estate might still be liable under the guaranty. Remember to give the lender notice in a probate administration. Bankruptcy Protection. Liability under personal guaranties can be discharged through the personal bankruptcy of the guarantor. That’s a good “out,” but the consequences of a personal bankruptcy are far-reaching. Pawn Kings. To avoid having to make a personal guaranty, you have to convince the lender that your business is good for the money. The most common way of doing this is through the pledge of other valuable collateral—just like a pawn shop. It helps to have a good credit history, too. No Guaranty. Personal guaranties are great for lenders, but they’re no slam dunk. A lender seeking to enforce a personal guaranty has to track down the guarantor, sue him or her personally, prove that the guarantor is liable for the debt, and then enforce the judgment against the guarantor’s unprotected assets, whatever they are. It’s a long, costly process, and the guarantor is likely to fight it every step of the way. While personal guaranties offer protection for lenders, they are a financial risk for individuals with small businesses. With a personal guaranty, you pledge your assets, including your home, bank account, and wages, as collateral. Personal guaranties are not for everyone, but it may seem like the only way to get your business started. BrewerLong can help. We have years of experience representing small businesses and business owners in the state of Florida. Set up a free consultation by calling us at 407-660-2964 or contact us online. We are happy to advise you on business contracts and liability to ensure protection of your assets.
Even small, simple operations have plenty of moving parts. Use these ten key points to keep your company running smoothly, protect your assets, and avoid litigation. The Must-Have. Don’t go into business with others unless you have an Owners’ Agreement. You can’t see the future, and you can’t be certain that you and your business partners (or their spouses or heirs) will always agree on everything. Why So Formal? Company formalities are important to limiting your personal liability for the company’s obligations. Have separate company bank accounts, separate company financial records, separate company e-mail addresses, and whatever else needed to clearly separate the company’s life from your personal life. If you don’t respect this separation, the courts might not either. This Time, It’s Personal. Lenders and financing companies almost always require the owners of a closely held business to sign personal guarantees. This means they can sue the company, the owners, or both. Do what you can to limit personal guarantees. If you leave the company, understand what happens to your personal guarantees (and try to terminate them). Get Secure. Unless you get paid in full at the time goods or services are delivered, get security for future payments. Security might take the form of an escrow deposit, a personal guarantee, a bank letter of credit, or a pledge of the purchased goods or some other collateral. Whatever the security, have a written agreement that clearly states your rights in case of nonpayment. Business Straight-Jackets. In many cases, restrictive agreements are enforceable (provided they are reasonable in duration and geography). Know what restrictive agreements apply to you and the people you hire. Use restrictive agreements yourself to ensure that the person you hire today isn’t competing against you tomorrow. Protect the Good Stuff. You don’t have to be the latest dot-something tech company to have valuable intellectual property. IP may include your name, slogans, website, plans, and just about anything else you (or someone else) has thought of. If someone else develops your IP (that web designer, for instance), make sure the creator assigns all the rights to you. What’s in a Name? Not much, when it comes to “independent contractors” or “employees.” Whether a person is an employee (which requires tax withholding and other administrative burdens) or an independent contractor (which doesn’t) depends on what he does and how he does it. If you can tell a person how, when, and where to do her job, she’s probably an employee. The Tax Man Cometh. Collecting taxes and delivering them to the taxing authority is a big deal. Employment taxes you withheld and sales taxes you collected are not yours, they belong to the government. The government will get them, with penalties and interest (or worse!) if they’re late. Fresh Stock for Sale! Selling equity (stock, units) in your company may seem like a great way to raise capital. It’s also a great way to have financial investors and security regulators looking over your shoulder. Don’t sell equity if there’s a better way, and there’s probably a better way. Here’s the Catch. Even if you have the right written agreements, it costs money to enforce them. Your agreements might provide that legal fees and costs go to the prevailing party (most of them should), but you won’t get that until the end (and only if you go to court). Litigation is always an expensive last resort.
An Owners Agreement is a document between the owners of a company about how to manage the business. Sometimes these documents are called Buy-Sell Agreements or Shareholders Agreements (depending on the structure of the business). No matter the name, the goal is the same: to keep all the owners on the same page about running the company, including deciding what happens when one leaves. It is critical to have a well-drafted Owners Agreement to guide your company. You must make sure any ownership transitions are smooth and handled efficiently. Here are eight of the most important reasons you should have an Owners Agreement: 1. Bylaws and Operating Agreements won’t cover you. Bylaws are a necessity for corporations, just like Operating Agreements are for LLCs and partnerships. But, they’re not Owners Agreements. Bylaws and Operating Agreements deal with the internal management of the business, like rules and regulations for how it operates. Bylaws also govern the relationship between shareholders, directors, and officers. Although LLC Operating Agreements can touch on some of the same issues as an Owners Agreement, they aren’t as detailed. Owners Agreements have one specific focus: the relationship among the owners, and especially transitions in ownership. The owners could be the members and managers of an LLC, the partners in a partnership, or the shareholders. The relationship between the owners is by far the most important, which is why Owners Agreements are a necessity. 2. You need a plan for unexpected events in any of the owners’ lives. What happens to the business when an unexpected event strikes one of its owners? Life often changes in an instant. Events like bankruptcy, divorce, disability, or death could fall upon any of the owners at any time. If there is no plan in place for such an event, the business could crumble. A well-drafted Owners Agreement can help guard against any unexpected event by making sure all relevant parties know in advance how to handle it. 3. You need to protect the business. In an ideal world, all business partners would be completely trustworthy. In the real world, that’s not always the case. Your business partners may have debts you didn’t know about. They may also have ex-spouses who try to go after the business in the divorce. With an Owners Agreement, you can plan for these issues and ensure that the ownership interest does not wind up in the wrong hands. 4. You’ll avoid deadlock. You and your business partners may be reasonable people, but sooner or later, even reasonable people can disagree. In a small business, like a partnership or LLC (sometimes, even in small corporations), decision deadlock can cripple the business. Have an Owners Agreement drafted well in advance to set up creative solutions for future deadlocks. 5. You can spell out what the owners are (and aren’t) allowed to do. Having put time and resources into building the business, the last thing you want is for your business partner to turnaround and compete with it. On the other hand, you might not care if your business partner has a side business (in case you want one too, for example). An Owners Agreement can help the owners agree on what should and shouldn’t be allowed, in terms of competing with the business you’ve built together. 6. You can remove former employee-owners. If an employee-owner quits or is fired, you may not want to allow that person to maintain their ownership interest. Without an Owners Agreement, however, you might be facing this awkward situation. Your Owners Agreement can have a clause that requires a buyout for any employee-owners who leave the company. In this way, you’ll always have owners around who remain invested in the company. 7. You’ll set the details around the buyout. The Owners Agreement can and should address the purchase price and payment terms for the buyout of an owner’s interest. You or your business might suffer from an unexpected obligation (or opportunity) to cash out an owner. You’ll want to make sure the Owners Agreement has set a method for valuing the ownership interest and funding the buyout. 8. You won’t fall into your state’s default rules. Sometimes, a state’s business default rules are just fine, but more often, you and your business partners will want things your way. In an Owners Agreement, you can fully customize your business. If anything ever goes wrong, you can also ensure that you don’t fall into non-favorable state default rules. Having a well-drafted Owners Agreement at the beginning of your business’ life is just the first step. As your company grows, your Owners Agreement may not fit so well. That’s why it’s essential to review and update the Owners Agreement every few years to make sure that it continues to make sense for your business. Whether a business grows and thrives depends on the relationship among the business’s owners as much as any other factor. Having an Owners Agreement especially prepared for the owners is key to their relationship. Business Attorney Trevor Brewer GET HELP WITH YOUR OWNERS AGREEMENT Owners Agreements are complex documents. An experienced attorney can help you and your partners navigate the waters of starting your business together. For help with your Owners Agreement, call our office at 407-660-2964, contact us online, or email us at firstname.lastname@example.org.
Whether you’re just starting or you have an existing company, you may be considering forming an LLC. Here’s what you need to consider before you do: 1. Corporate Gymnastics LLCs are a flexible form of business entity with fewer mandatory rules than apply to LLCs than to corporations or partnerships. However, this flexibility means that all of the details governing each LLC must be spelled out in long, complicated Operating Agreements. 2. Limited Liability Like corporations and (some) partnerships, LLCs offer their members limited liability. Each member of an LLC may lose his or her investment in the company, but the member’s other property should not be subject to the LLC’s liabilities. Of course, creditors know this too, so members are often required to personally guarantee loans and other obligations of the LLC. 3. The Rule Book An LLC and its members are governed by the Operating Agreement. The Operating Agreement should cover such topics as management of the LLC, capital contributions from the members, distributions of net profits, and ultimate liquidation of the company. 4. Upper Management An LLC can either be managed by its members or managed by one or more managers who might or might not be members. Even where an LLC is manager-managed, there are usually some decisions that must be made by the members (such as a sale of the LLC). LLCs do not usually have traditional corporate officers (like president, treasurer), but they can. 5. Ante Up The investments members make in the LLC are called capital contributions. Capital contributions can be cash or anything of value. A key term of the Operating Agreement is whether existing members can be required to make additional capital contributions. 6. Pride of Ownership Unlike corporations, in which ownership is evidenced by stock, ownership in LLCs may be denominated and evidenced in many different ways. A member might simply own a percentage interest recorded only on the LLC’s books, or a member might own membership units or shares that are represented by certificates. 7. Returns on Investment Net profits of the LLC are generally paid to some or all of the members in the form of distributions. When and how distributions are made should be addressed in the Operating Agreement. Members can divvy up the profits in almost any way imaginable. 8. Pick Your Poison By default, LLCs (those with more than one member) are treated like partnerships for income tax purposes, but they can instead elect to be treated like corporations (even S corporations). LLCs with only one owner are completely ignored for income tax purposes, meaning that they are lumped together with their owners. 9. Taxing Calculations The taxation of partnerships, and therefore most LLCs, is very complicated. The LLCs do not pay taxes themselves (in most cases), but they do have to file tax returns. Net income passes through to the LLC’s members in the form of allocations to member capital accounts, which must comply with very detailed tax rules. Bottom line: have a good CPA. 9. Charge! When a corporate shareholder is sued, it’s possible that a judgment creditor could end up controlling the shareholder’s stock, including the right to vote. In an LLC, the judgment creditor of a member is only entitled to a charging order, which is the right to receive distributions when and if paid. The judgment creditor of an LLC member cannot participate in the management of the LLC.