This issue comes up often and is often confused because the vast majority of New York corporations and businesses are small closely-held businesses. That is, they are businesses where the shareholders are also the employees and officers of the company. That is you start a business, you have one or two partners, you are all equal shareholders and you all work together in the business. In time the business grows and you add more employees.
A Mixed Bag
So are you an officer, director or shareholder? Well chances are you are all three. Under New York law, technically, the power to manage the affairs of a corporation is vested in the directors and officers of the corporation. However, since the majority shareholder control who becomes or remains an officer and director, the majority shareholders, technically, influence and control the business.
So when dealing with small closely-held businesses the roles are almost always mixed and things typically work out. However, when partnership disputes arise these roles and titles become a little more important and can have an impact on how a dispute with your business partners turns out.
Some Tips for Ironing Out Your Corporate Structure and Avoiding Partnership Disputes
• TIP 1 – A Shareholder Agreement. The greatest asset and tool that you can implement and possess is a clearly drafted shareholder agreement that states who the officers and directors of the corporation are.
• TIP 2 – Employment Agreements. If you and your fellow shareholders also work for the business then in the shareholder agreement or in separate written employment agreements, specify and state the terms of each persons employment and how long the employment will continue. For example will employment be guaranteed for a set number of years, will it be guaranteed as long as everyone remains a shareholder?
• TIP 3 – Delineate the Forms of Shareholder Compensation. In your shareholders agreement identify how each of you will be compensation. Consider that as a the owners of a small closely-held corporation chances are that you and your partners will care whether the income you receive is called a salary, dividend, profit distribution or something else. But it is important to identify how profits will be distributed and whether or not there are caps on the salaries that may or may not be paid to your fellow shareholder partners.
I can guarantee you that if there is time to implement and adopt Tips 1, 2 and 3, then you will be doing yourself and your business a great service and you will be reducing the likelihood of a harmful partnership dispute. If you didn’t have the time and a partnership dispute is brewing, learn more about your options by ordering a free copy of Charles N. Internicola’s book The New York and New Jersey Partnership Dispute Guide.