Shareholder and Partnership Agreements
Hammond, Indiana, Residential Shareholder and Partnership Agreements Lawyers
Shareholder and Partner Relations
Where more than one person is to be involved in the business, great care must be taken to ensure that all "partners" in the venture communicate freely about continuation of the business should one or more of the partners be unable or unwilling to continue in the venture. Drafting written agreements between the "partners" can enable the business to survive and thrive, while affording the individual "partners" a level of comfort as to their individual role and stake in the business. These agreements may take many forms, including, corporate by-laws, employment agreements, promissory notes, security agreements, and buy-sell agreements. Many, if not most, business owners overlook a critical element of their operating agreement that can save them both money and angst: buy-sell provisions. When you create buy-sell, or buyout, provisions for your operating agreement, you and your co-owners can prepare for events that have been the downfall of more than a few successful small businesses -- namely, the death, divorce, bankruptcy or retirement of one of the owners. Because of the essential and sometimes overlooked benefits of buy-sell agreements, what follows is a discussion of those agreements.
What Is a Buy-Sell Agreement?
Contrary to popular belief, a buy-sell agreement is not about buying and selling companies; rather, it is a binding contract between business owners. A buy-sell agreement is made up of several clauses in your written operating agreement (or it can be a separate agreement that stands on its own) that controls the following business decisions:
- Who can buy a departing member's share of the business (this may include outsiders or be limited to other business members)
- What events will trigger a buyout (see the list below)
- What price will be paid for an owner's interest in the business.
- It may help to think of a buy-sell agreement as a sort of "premarital agreement" between you and your co-owners.
What Events Should You Cover Under a Buy-Sell Agreement?
Your buy-sell agreement will instruct and remind you and your co-owners how you have agreed to handle the sale or buyback of an ownership interest when one member's circumstances change. Typically, the events that trigger a buyout of a member's interest under a buy-sell agreement are:
- An attractive offer from an outsider to purchase a member's interest in the company
- A divorce settlement in which a member's ex-spouse stands to receive an ownership interest in the company
- The foreclosure of a debt secured by an ownership interest
- The personal bankruptcy of a member
- The disability, death or incapacity of a member
Why You Need Buy-Sell Provisions?
It's a huge mistake to ignore the fact that sooner or later your business will change. If you doubt this even for a minute, think about what would happen if you don't create a buy-sell agreement and one of the following occurs:
- One member quits to move to another city or leaves to start another business. Without an agreement, your business might be automatically dissolved, forcing you to divide any assets and profits among the business owners and decide whether to start a new business with the remaining business owners. If your business doesn't end, you must still decide whether you should buy out the departing business owner's ownership interest, and for how much.
- One member dies, gets divorced or becomes mentally or physically incapacitated. In this case, you might have to work with the spouse or other family member of a deceased, disabled or divorced owner. There is a substantial possibility that the family member would be inexperienced or otherwise unable to act in the best interests of the business. On the flip side, you (or your family) might get stuck with a small business interest that no outsider wants to buy and for which no insider will give you a decent price.
- One member sells his or her share to a stranger or to someone you know well and can't stand. In this case, you may be forced to share control of the company with an inexperienced or untrustworthy stranger -- or you'll be faced with the struggle of running a business with someone you'd rather not even see on the street.
Just looking at this list, it should be obvious that if you don't anticipate and plan for circumstances like these, you're risking serious personal and business discord -- perhaps even court battles and the loss of your business.
Contact our Indiana Business Attorneys
Please contact the Indiana business lawyers at Efron & Efron. Our attorneys can be reached by phone at  931-5380, by e-mail, or by filling out the intake form on our Contact Us page.