First, you need to sit down with all of your potential business partners and discuss how you are going to proceed with the business venture. This is assuming that you have already done your due diligence and are comfortable with having each as a business partner. Follow your gut in this. No type or amount of paper is going to save you from untrustworthy business partners.
Then, all of the participants need to agree on the business plan (not just cocktail napkin treatment). A written agreement should be reached on the business entity to be used to execute the business plan. Partnerships and joint ventures are common, but involve joint and several liabilities to all business owners. A corporation or LLC limits such liability against the owners, if set up and operated properly. The business partners’ tax advisors should be involved in the final decision, as the tax tail sometimes wags the business dog.
Once these matters are agreed, an owner’s agreement should be drafted and signed setting forth the business plan; the business entity; the capitalization dates, types, amounts and events; and the ownership split and profit split, if different (possible with LLCs). The parties need to decide in advance, who will be the initial or continuing directors or managers (LLC); which decisions are to be made by the owners versus the directors or manager versus the officers; and who will be which officers, including the tax matters partner for LLCs.
This agreement also needs to cover withdrawal rights, if a partner just wants to leave, and restricted rights to transfer ownership, to protect the remaining owners from undesirable new owners. Any future obligations to loan money or provide services should be covered by loan documents and restricted ownership interest agreements, so that ownership interests do not vest prior to future performance of each owner’s obligations.
Once this agreement is in place, it is time for all of you to successfully execute the business plan.
Important Proviso: The above material does not constitute legal advice and should not be relied on. It does not create an attorney-client relationship. Each locality has differing laws. A legal matter cannot be satisfactorily resolved without a comprehensive review and analysis of all the unique facts and laws at issue by an able attorney. Your matter may result in a loss of rights if you do not timely retain such an attorney.
Contact: If you would like to discuss this matter further in a more private forum, please feel free to contact me directly at the email address provided through my firm’s website located at http://BealBusinessLaw.com.