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A Well-Drafted Ownership Agreement is Like a Prenup Preventing a Messy Business Divorce. Nothing lasts forever, even your business. The more co-owners there are, the greater the chances internal disputes will bring them to an end. An ownership agreement can create rules to help resolve disagreements before they threaten the business. If the parties still want to separate, an agreement can lessen the damage if that happens.
There are different legal forms ownership can take. There are steps available for each.
General Partnership
This form is the simplest, but partners face potential personal liability for the acts of other partners and the business. If this is the right form for your business, an ownership agreement can account for:
- Partners could have the freedom to come and go as they please. An agreement may make ownership more manageable and stable by limiting how and when a partner leaves. If someone wants to leave on a whim, no matter how it harms the business, they could be subject to financial penalties.
- Expelling a partner under extreme circumstances. If a partner acts against the business’ interests or no longer participates in it, they could be removed by a vote by other partners. The agreement should state how the expelled partner would be paid for their interest.
- Paying partners for their share of the business if the partnership dissolves. This process should be thought through when partners are clear-thinking, unemotional, and things are going well, not when they’re pointing fingers and yelling at each other. You want to avoid a situation where a disruptive partner holds the business hostage by demanding payment for their interests far above its legitimate value, knowing the other partners are eager to wash their hands of him.
Address these issues early in an ownership agreement and avoid rash decisions in the heat of the moment that may be challenged in court.
Limited Partnerships
A limited partnership involves limited partners who may have no role in running the business and a general partner who has that job. In exchange for being sidelined in company management, limited partners don’t face personal liability for the business’ acts. The general partner takes on that risk.
In addition to the suggestions for a general partnership owners’ agreement:
- Consider a mechanism for a limited partner to be paid for their interest in the business so they can withdraw from it. If there’s no off-ramp for a limited partner, they can be disruptive and may start legal action to get what could have been accomplished through an ownership agreement
- If a partner dies, declares bankruptcy, or is divorced, other partners may have to unexpectedly come up with the funds to buy out their share of the business. As part of the agreement, it can state how a share should be valued and that partners are allowed to make payments over time if they buy out another.
LLPs are for professional services. Their members have better things to do than spend their time, energy, and resources on lawsuits.
Limited Liability Company
A limited liability company (LLC) is a hybrid between a corporation and a partnership. Under California law, a member can ask a judge to expel a member if they’re committing several things that are contrary to the business’ interests or harmful to other members. That right could be modified by allowing a member to exit the business and sell their interest to the LLC or another member using an agreed-upon
valuation method.
An Ounce of Angry Business Divorce Prevention is Worth a Pound of Cure
We’ve drafted hundreds of ownership agreements, and representing parties involved in ownership disputes is a significant part of our practice. We know what can turn co-owners against each other, how you can be left holding the bag, and how underhanded a once trusted fellow business owner can be.
Get the help you need to create an agreement that serves your interests and those of the business. We draft, negotiate, and execute ownership agreements. If you want one created, an existing agreement needs changes, or you need help with a group of owners pulling your business apart, call us today.
Focus Law is an established business law firm that helps clients deal with this business issue. We’re available at (714) 415-2007 or you can reach us by clicking here.
