That food truck you started with your best friend, the online T-shirt shop you run with your sister-in-law, the design business you started with friends from the coffee shop – all examples of small businesses that came from big ideas.
While these businesses may be considered small, they are still a business and you need to ensure you have the proper documentation and agreements in place in case an issue occurs.
Yes, we all want to believe that if we are in business with family or friends, resolving a potential dispute will be easy. But that is not always the case. While operating on a handshake is good while there is no problem, when you do run into a disagreement, it is vital to make sure you have operating or shareholders agreements. These agreements will dictate what happens if there is a dispute between the parties.
An operating agreement outlines the ownership and the duties of the members of a limited liability company. A shareholders agreement does the same thing for a corporation. Things like what percent each partner owns (not always equal), who has what titles and responsibilities, decisions about what to do if someone wants to leave or close the business, compensation information, etc.
A buy/sell agreement outlines what would happen if one of the partners decides to leave the business, becomes disabled or passes away. For example, let’s say you are married to someone who owns a business with another person and your spouse passes away. You are now the responsible party that will either have to buy out their partner or you might have to step into the business yourself. Depending on what your agreement says, you could be stuck with that other person as a business partner! Often, the buy/sell agreement language can be included in a well-crafted operating or shareholders agreement.
But wherever this language is located, you should fund it with insurance. Let’s say you own a business with someone and they pass away. Your agreement (buy/sell, operating or shareholders) may require you or the company to purchase that interest or shares from your partner’s heirs, but if you don’t have the money to do that, you are stuck trying to raise the funds to buy them out. If you have insurance in place, you’ll have a much easier transition. This also saves you from running a business with someone else that isn’t interested. There are many options available – term life insurance is usually a good option and it’s not as costly as you might think.
Don’t forget to update the valuation of the shares or interest on an annual basis, too. Imagine setting the share valuation of a new company at $100 a share and 10 years later the shares are actually worth much more – BUT the annual valuation hasn’t been done in a long time and the person buying the shares only has to pay $100/share.
These agreements are also important when it’s time to add a new partner or shareholder to your business. Things can go sour. Partners argue. A handshake and a verbal agreement do not hold up. Legal fees are extremely expensive. You don’t want to spend months or years in court, wasting money, when a simple agreement could save you from all of that.
It’s also necessary to create regular service agreement contracts, vendor agreements, independent consultant agreements. Figure out what you need and get it all in writing! We can help! Confidentiality, non-compete clauses, there are so many ways to protect yourself and your business and you should do everything you can to do just that.
You also want to make sure your corporate books are in order. If you haven’t done this yet and need help, please reach out. NYS actually has very specific laws governing how a corporation should be run, with annual meetings and minutes, etc. Most small businesses do not even open their corporate book after they get it. But if you need financing, the bank is most likely going to need to see those records. It’s better late than never. And if you want to start a small business, now is the time to start thinking about what you need and get documents created in advance.
Come to Sugarman Law and talk to someone face-to-face or screen-to-screen, whatever you prefer. We are here to answer all of your questions, give you information and resources, help with your business planning, agreements, financing questions, etc. Personal connection often gets lost in our digital age, but we thrive on really knowing our clients and building a solid relationship.
In firm and personal news, I am still very busy with real estate work. I hope to get back to speaking and presenting soon. My husband is easing into retirement and I am already thinking about summer traveling plans. It’s been way too cold! We’re looking at colleges, narrowing it down to three – hopefully we will be able to share some acceptance letters in our next issue.