What type of ownership agreement do I need?
People often refer to an ownership agreement as a “partnership agreement” but they actually have different names depending on the type of business structure. Below are the types of agreements with their corresponding business structures:
- Shareholders Agreement – for Corporations
- Operating Agreement – for Limited Liability Companies
- Partnership Agreement – for Partnerships
- Buy-Sell Agreement – for any type of structure – only contains Buy-Sell Provisions
What are Buy-Sell Provisions?
Buy-sell provisions are those that deal with ownership changes in certain situations. For example, if an owner wants to leave the business and sell his or her ownership interest, how can that be done? The buy-sell provisions will tell you. They also deal with other situations where there may be a change of ownership such as divorce, death, disability, and bankruptcy. Often owners like to include provisions that can address long-term absences from the business and extreme misbehavior by an owner so that there are options for restructuring the ownership in those situations.
What other provisions should my agreement include?
The agreement should describe the authority of the owners to act on behalf of the business, the employment and retirement of the owners (if applicable), the tax treatment of the business and how it can be changed, allowance of loans to the business by the owners, major decisions that require unanimous approval, procedures for handling disagreements, and many other provisions that can help to prevent major discord among owners. The goal is to create a structure that will provide stability and processes for avoiding conflict.
Am I required by law to have an ownership agreement?
No. The law does not require any business structure to have an ownership agreement in place. But it is always good business practice to have one.
When is the best time to do an ownership agreement?
Now! Of course, the best time to do one is at the beginning of the business partnership. The process of putting the agreement together allows for each of the partners to ask questions and understand how their future relationship will work – before they start. If a business has already started, the best time to do an ownership agreement is when the partners are getting along and optimistic about the future. Once disagreements start, it’s too late to put an agreement in place.