Key Provisions to Consider in Governing Documents for your Business
Are you ready to go into business with someone? That is excellent news, but make sure you are prepared — even when the other party is a longtime friend, family member, or business associate. Things can seem easy and reliable in the beginning; but like any relationship, there is a chance it will deteriorate. You may find yourself having multiple disputes or even suffer a complete breakdown in communication that leaves your business at risk of being dissolved.
One way to reduce the risk of disputes and possible dissolution is to have governing documents for your business. This is where an experienced business formation lawyer can help. At MendenFreiman, we have years of experience helping Atlanta area businesses with their business formation needs.
Here is a look at some of the key provisions to consider before starting a business:
Choice of Entity
Choosing the type of business entity is a fundamental initial decision. For many, a limited liability company makes sense. However, you may want to consider a limited liability partnership or corporation, depending on the specific characteristics of your business. You should discuss these options with experienced business counsel before commencing business.
In conjunction with selecting the business entity, you should consider how your business entity will elect to be taxed. For example, a multi-member limited liability company can be taxed as a partnership, an S-corporation, or potentially other choices. It is imperative to work with your attorney and accountant to make an appropriate tax election to avoid unexpected tax consequences.
You need a written operating agreement, partnership agreement, or bylaws specifying — among other things — ownership interest of the business owners. You should also track contributions made before opening. There are other methods used to calculate ownership percentages, which is why you must state precise ownership amounts.
How will important decisions be handled in your business? Making decisions is one of the areas where businesses are most at risk because business owners do not always see eye to eye. Do not let your business operations suffer because you do not have an explicit provision on decision making in your governing documents.
When you do find yourself in a business dispute, your agreement should state how disputes will be handled. Spelling out dispute resolution options in your governing documents can save time and money, because you can avoid court in many situations.
How Profits and Losses are Distributed
Strong governing documents include a section on how profits and losses are allocated. In partnerships, partners can share in both profits and losses (based on their ownership percentages) or they can be handled in a different manner. The agreement can also discuss when a partner can withdraw profits from the business.
What happens if a partner gets sick or passes away? What about someone who wants to retire? What if someone’s situation means they want to be bought out and move on with their life? These are all things that will be addressed in governing documents. What if, down the line, you want to renegotiate the terms? Include a section that discusses circumstances that will allow you to modify your agreement and how the process will work.
Contact an Experienced Business Lawyer
If you need help with your new business, contact MendenFreiman at 770-379-1450 to schedule an initial consultation. Let one of our skilled Atlanta business formation attorneys help draft appropriate governing documents for your new business.