If your new business has multiple owners, it is important to have proper governance documents—like a partnership agreement, operating agreement, or shareholder agreement. Typically, these documents address topics like who can make day-to-day decisions on the company’s behalf, how ownership interests can be sold or transferred, and who decides what the company does with net profits. These documents can reduce the potential for costly disputes down the road and should be drafted around the owner’s specific needs and goals. Here are some topics that you’ll be discussing when you meet with your lawyer. We recommend that you begin talking about them with your co-owners beforehand:
- What percentage of the company will each owner receive?
- Can new owners (such as investors) be added? If a part of the company will be sold, should existing get the opportunity to buy that part before it’s available to outsiders?
- If an owner wants to sell their ownership interest, can they sell it…
- …to anyone?
- …to anyone, as long as neither the company nor the co-owners want to purchase?
- …only to the company/co-owners?
- If an owner dies, can they transfer their interest through their Will or trust? If so, are there restrictions on who they can give it to?
Profit and loss
- Will profits and losses be shared equally, or will they be based on the size of a member’s financial stake in the business?
- Will the business distribute all the profits it receives, or will it retain some profits for internal use?
- Will there be startup costs or capital expenditures? If so, what will each initial owner’s contribution be (financial or non-financial)?
- Will the company take out startup loans? If so, will the loan be from a commercial lender, or from an owner?
- Who will manage the business?
- A Board of Directors?
- All of the owners directly?
- One or more persons (owners or non-owners) who would be appointed as managers?
- If there are multiple managers, will duties be shared equally or divided up?
- How will new managers be selected?
- Can managers be removed during their lifetime?
If you’re not sure about the implications of each decision, your attorney can help you explore them. For example, if you don’t know whether you want to add investors in the future, but you do know that you and your business partner(s) want to always have full control over business decisions, let your attorney know.
As always, the best governance documents are those that accurately reflect how your company operates. Governance documents that are tailored to your company’s operating structure can set uniform expectations and provide clear limits on authority. Don’t hesitate to contact us if you have questions about preparing business governance documents.