Creating a Partnership or Shareholder Agreement
Establishing the Right Foundation For Your Business
Shareholder and partnership agreements are critical for business success. A properly prepared shareholder agreement (one prepared today) will assist in avoiding unnecessary disputes later on. The majority of small closely held businesses do not have a shareholder or partnership agreement. That is, the founders establish the business with the best of intentions and a great relationship. However, over time, things change and whether related to a partners personal situation or a change in the business environment "partnership disputes" do arise. How these disputes are dealt with, in large measure, is determined by (a) whether or not you have a partnership agreement, and (b) the quality of your partnership agreement.
"Your" Partnership Agreement Must Be Specific to "Your" Business
Far too many partnership and shareholder agreements are generic, poorly understood and create more problems than they solve. How do I know this? Because in addition to preparing shareholder and partnership agreements, I am a partnership dispute litigation attorney. That is, when a dispute arises I litigate cases between partners so, in a very real world sense, I have seen all types partnership agreements and, most important, I understand how these agreements are interpreted by courts and how they "play out" when a dispute arises. Remember, the goal of a good partnership agreement is to avoid extensive and wasteful litigation and disputes.
When it comes to preparing your partnership agreement you must avoid the generic and focus on a governing document that matches your business relationship and your business. Some of the factors that should be considered and discussed with your shareholder and partnership lawyer include:
- Voting rights among the primary partners and the types of events that require a simple majority (51%) vote and those requiring a super majority or unanimous consent;
- If you have a group of partners, whether or not there will be a secondary class of stock (i.e., class B) where the secondary partners may not have voting control;
- The initial capital contributions of each partner;
- The management and work responsibilities of each partner;
- The obligation of each partner if future capital is required;
- Voting rights regarding business expansion and acquisition of new assets;
- Partner responsibilities if personal guarantees (on behalf of the corporation) are required;
- Rights and obligations upon death or disability of a partner;
- Rights and responsibilities if a partner wishes to sell or resign;
- Restrictive covenants and non-compete obligations imposed on each partner; and
- An agreed upon procedure for the resolution of disputes.
Why You Need To Get This "Right"?
Because far too often the greatest threat to closely held new York and New Jersey businesses comes from within. That is, disputes between business partners happens often and without a properly prepared agreement (a governing document) these disputes sometimes lead to damaging and wasteful litigation that hurts the underlying business, wastes assets and can destroy the value business assets that have been established.
What is the Next Step?
The next step is to take some time, plan out the trajectory of your business, understand the obligations that are expected between you and your partners and work with a partnership lawyer to structure an agreement that fits your business and addresses the "tough" questions right now. Establishing a partnership agreement (whether your business is a corporation, limited liability company or joint venture) need not be complex.
To learn more about how we assist New York and New Jersey business owners in establishing their partnership agreements contact us by email or contact our Client Coordinator - Samantha Cavitolo - at (800) 976-4904 or (718) 979-8688.