Use It or Lose It: 3 Must Have Business Agreements

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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If you are in business with one or more other people, have you considered what would happen to your enterprise if something happened to your partner? For example, if your partner gets divorced, you just might wind up in business with your partner’s ex. Even if you’re the only owner, what would happen to your interest if you split from your partner-in-life? You could lose control of your company. To avoid these and other catastrophes, put the ownership arrangements you’d like to see preserved in writing.

Shareholder Agreement

A shareholder agreement (also called a stockholder agreement) is a contract involving all of the stockholders of a corporation. The contract spells out certain rights and obligations among the stockholders.

• Restrictive covenants. While shareholders generally have the right to sell their holdings to anyone, the restrictive covenant limits such action. Usually, with these covenants, shareholders are required to offer their shares to the corporation for redemption or to other shareholders for sale before trying to sell to outsiders. This can be helpful to remaining owners if one shareholder wants out for any reason, is getting divorced, or dies.
• Conditions for bringing in new owners. You may need additional funding and opt for equity financing. Under what conditions can new owners be brought into the company? Remember that issuing additional stock dilutes the ownership interest of existing shareholders.
• Methodology for resolving disputes. As in marriages, those who work together may not always see eye to eye. Providing a mechanism for settling important questions can be helpful. For example, if one owner wants to sell the company while the other does not, mediation can be useful to determine which way to go. In some situations, arbitration may be a way to resolve certain disputes rather than having to go to court, and the contract can say so.

Partnership Agreement

Like a shareholder agreement, the partnership agreement is a contract that governs what happens to partnership interests in the event a partner leaves the business. Similar terms should be included in the agreement.

• When a partner leaves. Decide the buyout arrangement if a partner withdraws or dies. Make sure to include provisions covering what happens if a partner divorces.
• Conditions for admitting new partners. Again, if you want to bring in new partners – to add equity to the business or to expand operations – agree up front on the procedure to follow. This includes deciding how to set the price of admission.
• Methodology for resolving disputes. Like shareholders, partners can have disagreements. The agreement may provide, for example, that the partnership be dissolved if there is a disagreement about certain issues, such as relocation, expansion, or other major decisions.

Prenuptial Agreement

According to the U.S. Census Bureau, about 46% of couples who married 25 years ago are divorced. If one or both spouses owned a business, it is likely that the business became a bone of contention in their marital dissolution. It stands to reason; the business can be a substantial asset. Does the spouse who created the business necessarily remain in control?

Here’s where another contract comes into play. A prenuptial agreement, a contract signed in contemplation of a marriage, can dictate what happens to the business if something happens to the marriage.

Those who failed to sign such an agreement before marriage can still take action after the ceremony. A post-nuptial agreement can accomplish the same goals for couples of protecting their business interests if the marriage fails.

Bottom Line

In the excitement of starting up a business, many owners fail to consider the “what ifs” that can transpire down the road. Take the time now to assess your situation in light of the exposure of your business interest. There are numerous free and low-cost templates online to help you create each of these contracts from such sites at Blumberg Excelsior, FreeLegalForms.net, LegalZoom, and USLegal. However, it is highly advisable to have your attorney review them before you sign anything. The few dollars you spend on legal advice can save you thousands of dollars, and perhaps hours of heartache, in the long run.