General Business

Creating a Business Ownership Agreement

So, you and a friend have decided to start a new business. You have agreed on a concept, found a location you think is perfect, and you’ve even talked to your banker about financing. However, before you go any further with your plans, you need to make sure you have a strong ownership agreement in place.

The first step is to decide what form of business you should create. This will help to protect your personal assets from exposure to liability for the obligations of the business. In most states, the most common choices are partnership, corporation or limited liability company (LLC). A business attorney experienced in forming business entities and your accountant can help you decide what type of organization best fits the needs of your business.

You should always have a written agreement between or among you and your co-owners. That agreement will take the form of a Partnership Agreement, LLC Operating Agreement, or Shareholders Agreement, depending upon the type of business entity you choose to form. The agreement will govern all aspects of the relationship between or among the owners of the business. Because no two businesses are alike, your agreement should be custom drafted by a business attorney experienced in drafting such agreements.

Although it is impossible to anticipate every issue that will arise during the life of a business, the issues discussed below occur so regularly as to be predictable, which is why these basic provisions should be in every business ownership agreement.

  • Decide who will own the business and in what shares.
  • Decide how various management decisions will be made.
  • Designate the initial officers and define their duties to the company, as well as their authority to make decisions for the company.
  • Specify what happens if there is a stalemate in voting to settle a dispute. For example, the owners might agree to abide by the decision of a trusted neutral third party to break such deadlocks.
  • Describe what is being contributed by each owner.
  • If the business later needs additional capital, the agreement should specify how that capital will be raised.
  • Specify how and when proceeds of the business will be distributed to the owners.
  • Address issues relating to changes of ownership.
  • If an owner is contributing intellectual property to the new company, the agreement should specify whether the intellectual property is being donated, sold or licensed to the new company, how it will be valued and paid for, and what happens to it upon dissolution of the business.
  • Specify a mechanism for resolving disputes among owners; designate a tribunal for resolving such disputes, and identify the body of law (state or federal) that will apply, all in as much detail as possible: and specify a mechanism for dissolving the company, disposing its assets, and distributing the proceeds.

About the Author: Phil Kirchner is a member of Flaster Greenberg’s Litigation Department and a former managing shareholder of the firm and past chair of its Litigation Department.

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