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.