Avoiding Small Business Mistakes: Shareholder Agreements & Partnership Agreements

Every so often we receive a phone call from a troubled business owner regarding a disagreement in the governance of a business venture that involves one or more shareholders or partners.  More often than not, the problem is these shareholders and partners never entered into a shareholder agreement or partnership agreement that essentially would have laid out the general governance of the business including daily operations, distribution, salaries,  loans, and each of the shareholder’s or partner’s duties and responsibilities with respect to the business.

Unfortunately, most of the time there is really nothing that can be done (outside of aggressive litigation).  Unless the other shareholder or partner has done something which violates state law, or state rules and regulations, there’s very little nothing that can be done legally outside of litigation.  And litigation is sometimes costly and prohibitive and some business owners and partners don’t want to pursue litigation, which leaves the business at a standstill, and eventually leads to the demise of the business.

So what should persons seeking to create a new business venture do to avoid this dilemma? If you’re starting a new business venture and there are multiple shareholders or partners, always take the time to create a shareholder agreement or operating agreement between all of the shareholders or partners.  This one document can save the company as well as all shareholders and partners a significant amount of time and money avoiding litigation, and more importantly the document can be used as a roadmap in operating the business; all partners or shareholders duties, responsibilities, obligations to the business, time commitment to the business, general governance of the business, and general daily operations of the business can be facilitated through a shareholder agreement or partnership agreement.  The shareholder agreement or partnership agreement can also restrict the shareholders’ or partners’ ability to sell their stock or partnership interests to outside third parties (usually implementing a right of first refusal to the shareholders or partners), as well expressly permitting certain types of transfers (for example, transfers to family members).

Of course there are many issues that should be looked at and discussed when forming a new business and legal counsel should always be consulted prior to forming the initial business.  For more information on forming your new business in New York please call the New York corporate attorneys at Bashian & Papantoniou today.

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