When forming a business with multiple owners, there are a number of issues that the business should address in the very beginning.
The decisions regarding these issues should then be integrated into the company’s bylaws, member control agreement, ownership agreement, partnership agreement, operating agreement, buy-sell agreement, or a similar contract among the owners.
Decisions for New Minnesota Business Owners
When I am helping partners, shareholders, or other business owners start a business, these questions form the basis for our discussion.
- What is each owner contributing in terms of money, property (including intellectual property), and labor to start the company?
- What will each owner be expected to contribute in terms of money, property, and labor as the business grows?
- What ownership percentage will each owner have?
- What control/voting percentage will each owner have (this can be different from ownership percentages)?
- What percentage of profits will each owner get (this can be different from ownership percentages)?
- How long do you estimate it will it take before the business is earning at least $100,000 per year? (year 1? year 2? etc.)
- How much will the owners be paid?
- Will owners be paid a salary, bonuses, or commission?
- What duties/role will the owners have in the company?
- Which owners will fulfill the roles of president, treasurer, and secretary?
- What is the process for buying out the other owners?
- What is the process for valuing the business when one owner is bought out?
The answers to the questions above, which are provided by the new business owners, help me as a business attorney understand their business plans and desires. Then I determine the answer to the following questions:
- Should the business be a corporation or LLC?
- If the business is an LLC, will it be run more like a partnership (both owners own, control, and work in the business) or corporation (owners have different roles)?
- Should the business be taxed as a partnership, S Corp, or C Corp?
- Which method is best for appraising the value of a business when one or more owners decide to leave the business and want to be bought out?
After analyzing these issues, I discuss my recommendations with the business owners and then begin drafting the appropriate business owner documents.
What if Business Owners Don’t Make These Decisions?
If you already own a business, you might be wondering what the consequences are for not having made these decisions and how you can prevent those consequences.
For example, if business owners have no plan in place for one business owner to leave the business, they will experience problems when the time comes for one business owner to leave—or if there is a death, disability, divorce, bankruptcy, or related unexpected circumstance.
As another example, the consequences of not making the best tax election may result in business owners paying more taxes than necessary.
These issues can be addressed after the business is formed. An attorney will have no trouble drafting these documents after the business has begun. However, sometimes business owners have difficulty coming to agreement on these issues after the business has been in operation for a while because there may not be a lot of money, control, or other interests at stake.
A business attorney can help business owners come to an agreement and will then draft the appropriate documents to establish a plan before disagreements or other problems arise.