The Importance of Business Agreements from the Very Beginning of Formation

By Anna Savino

When forming a business with a business partner or multiple partners, defining the relationship between the partners and the business is extremely important. From the very beginning, business partners must determine the type of entity they wish to form, which protections they wish to provide to each other and to the corporation, how they want the corporation to be taxed and how they wish the business to be managed. Business partners should discuss each of the foregoing matters and include them in a written agreement. These written agreements become fundamental documents governing the conduct of business affairs, establish the procedure for exercising rights, and reflect the business partners’ purpose and intentions.

One of the first matters of business for any businesses, no matter the entity, should be to spell out how they want their business to operate in a written agreement. Corporations must have bylaws, which are self-imposed rules, resulting from an agreement or conduct between the corporation and its members to conduct business in a particular way. Bylaws specifically cover the number of directors, qualifications of directors, notice for meetings, restricting the power of directors to act without a meeting, prescribing quorum requirements, authorizing board of directors to create committees and specify their powers. Limited liability companies (LLC) have operating agreements, which are agreements between all the members as to the conduct of its business. Partnerships, whether general or limited, are not required to, but should have partnership agreements, which like operating agreements, are agreements between partners as to how a business should operate.

Each of these agreements has one thing in common – they consider how the business relationship should be carried on to avoid problems later on. Problems and conflicts will arise sometime in the business’s future and having a tangible document that determines how to proceed with problems and conflicts is essential to the business’s growth and prosperity. Although deciding how to deal with conflict before it even arises invites all types of questions because it projects a break in the business relationship, the business relationship will be stronger and safer in the long run. Preparing a partnership agreement at the beginning of the relationship will result in saving of costs, expenses, headache and heartbreak. If partners do not spell out each others’ rights and responsibilities in a written agreement, they will be ill equipped to settle conflicts when they arise and minor misunderstandings are likely to erupt into full-blown and damaging disputes. Also, if partners do not have a partnership agreement in place, the Uniform Partnership Act and various state laws determine how the disagreement is handled.

Drafting a formal agreement is important to determine how to deal with potential issues and to ensure that the business runs as smoothly as possible. The agreement should be tailored to each individual business and each business partners’ needs and wants and should cover the daily operations of the business, how decisions are made, how to resolve a dispute or deadlock, what to do if one of the business partners wants out or passes away. These issues may not seem like a big deal at the outset, but imagine if a business partner dies and the surviving business partner(s) is stuck doing business with the deceased partner’s spouse that they do not get along with or the deceased partner’s child who barely turned 18 and does not have any idea about running a successful business.

These agreements at a very minimum should include:

1. Each partner/member’s role;
2. How the venture is funded;
3. What happens when a partner does not fulfill his/her duties;
4. If a partnership took out loans, when the loans are to be repaid;
5. How decisions are to be made;
6. How disagreements are to be handled;
7. Who the directors are;
8. How salaries are agreed on;
9. What happens if a party dies or becomes unable to work;
10. What happens if a party wishes to leave the business;
11. If certain activities require unanimity or a majority vote and what those activities are;
12. What to do if further funding is needed;
13. How to sell your shares;
14. If partners/members or even the business can force a sale;
15. If restrictions on the transfer of shares are to be installed; and
16. If new partners can be admitted and the process of admitting them.

Many basic templates are available online, but business partners should make it a priority to customize their agreements to their and their business’s particular needs and goals. Even the best and most tailored agreements will not cover every possible scenario, but at least commonly occurring issues can be addressed to protect each of the partners’ interest and the business. Thinking about the future problems of the business does not have to be discouraging, but it can actually provide peace of mind as many issues are solved before they even occur.

Our attorneys can help tailor any of these agreements to meet a business’s particular goals so the business runs the way each business partner intends and to save any future heartache or headache.