WILL YOUR BUSINESS’S LEGAL STRUCTURE WORK?
Does your business have a legal structure that will guide ownership through both success and hard times? Closely held businesses are a vital and volatile element of the business landscape. Some new small businesses fail in the first year and many more in the first five years. If you live in an urban area, you have seen enough retail store fronts and restaurants come and go to know that creating a new business is not a venture for the faint of heart. However, there are countless success stories of people coming together and creating a concept that succeeds, either on the local level or as a national brand.
There are well-capitalized national brands that have many locations; not surprisingly, these are typically not the ones that fold quickly. Many if not most local businesses are closely-held businesses, meaning business units owned and operated by a small group of individuals, or a group of individuals on the operational level with some source of funding. These business arrangements frequently are launched without a carefully written agreement or any agreement at all. In the beginning, the parties are quick to try and nail down the basic financial parameters but, frequently, insufficient thought is given to the intricacy of an ongoing business relationship. Any new business can be a complicated endeavor, and so many things can go wrong.
A clear agreement needs to be made on what the responsibilities, obligations and rights are for each party with respect to what is being contributed to the endeavor, what is being earned, and what is being returned. There should not be any “agreements to agree” or promises to consider changes in the financial terms of the agreement that are undefined. This will only lead to bitterness and litigation. The parties need to agree on exactly what everyone’s share of any financial calculation is and if the actual numbers cannot be known, as is frequently the case, then a formula needs to be developed. The agreement should cover as many things as possible, such as the death of a principal, a retirement, or a buyout process. The financial considerations of these events need to be addressed. A death buyout of a principal can be funded by insurance, for instance.
Everything comes to an end, and someday the business may close, be sold, or be passed on to the next generation of leadership. An agreement needs to be made to address those events and define how those events will work. It is not advisable to say let’s deal with that when we get there, because by then expectations, reasonable or not, will be part of the collective personality of the group. There will be no persuading people of what they think they deserve, or who they think is responsible if the business fails. The agreement needs to anticipate these developments and not leave it up to emotions in the moment to define what happens.
It is a lot to consider, especially while you’re trying to launch a business. The more you have in writing now about the future of the business, the better your future will be.
Peter P. Lindley, P.A. is a law firm has more than 3 decades of combined experience in general corporate, real estate, and commercial law practice areas. The firm also consults with clients in their estate succession and planning matters.
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