The importance of agreements among multiple owners of a business
Timothy A. Berger
Although it is increasingly easy and common for individuals to form business entities without first consulting a lawyer, one of the pitfalls to doing so is that even when there are multiple owners, they often do not think about the need for an agreement that establishes the rights and obligations that they owe each other. Obviously, if a business entity has only a single owner, this is not an issue unless and until that owner considers transferring an ownership interest in the business to another person. However, if an entity will have more than one owner, it is advisable to meet with a business lawyer to review the issues that can arise.
Business entities include corporations (including s-corporations), limited liability companies (LLCs) and partnerships. Often, two people who have known each other for a while decide to go into business together and form one of these entities on their own. When they do so, they often have only a rudimentary (and often oral) deal as to how the business will operate.
Depending on the type of entity, Pennsylvania law establishes certain general principles that apply to its operations. If no issues arise among the owners, the informal agreement may be all that is required. However, when you go into business with someone else, it is like a marriage and, just as disputes arise in many marriages that can lead to a divorce, disputes similarly arise among the co-owners of a business. Over the years, I have seen a number of business ventures that started off amicably end in protacted, ugly lawsuits between the owners.
In some cases, a written agreement can avoid or head off such disputes. In other cases, the agreement may establish the ground rules for dispute resolution. Agreements can also provide protection from issues arising out of unanticipated changes in the personal life of one of the owners -- such as a divorce -- that could result in third parties obtaining an ownership interest in the business.
Among the issues that should be considered are:
*Limits on the ability to transfer or pledge an ownership interest.
*What happens if one owner wants to sell and another does not?
*Are there any situations where an owner should be forced to offer to sell his or her interest in the business and, if so, the price of that sale?
*How are profits to be distributed?
*Do the parties want to establish any limits or controls on disputes so as to prevent or reduce the likelihood of litigation?
If you are a co-owner of a business that does not have a written agreement among the owners, and you want to further discuss whether you need such an agreement, please consult your attorney or feel free to contact me to schedule an appointment.
