YOU MAY WANT TO HAVE AN OWNER’S AGREEMENT
We used to call them Shareholder Agreements back when most Indiana businesses were formed as corporations. That day has passed, and more businesses are formed as limited liability companies or other alternative organizations. So, for this article, I will refer to them generally as an Owner Agreement.
Here are 10 situations where you may want to consider using an Owner Agreement customized to the type of business entity you are operating.
Owners may agree on how they will vote their ownership interest. They may agree amongst themselves, and they may also agree with non-owner parties.
You may wish to restrict who can own the company. Some types of entities allow relatively free transferability of ownership interests. If you want to be picky about who can be a partner in your business, you may wish to restrict who can own it.
You may wish to create a market for ownership interests that would otherwise have limited attractiveness to third parties. A 10% ownership interest in a closely held business has very little market attractiveness outside of the original owner group. The inability to sell the interest on the open market may trap a lot of each owner’s value in the business unless the business creates a market for it.
You may wish to retain a particular owner’s active involvement in the company by modifying buyout terms to make them more favorable the longer the individual remains with the company.
You may wish to protect the tax treatment of the entity. For example, only certain qualified owners can be a shareholder in a Sub-Chapter S corporation. You may wish to prohibit transfers to non-qualified owners.
Divorces happen in business. You may wish to establish a method for fairly and smoothly separating incompatible business owners.
If a substantial portion of an individual’s wealth is tied up in a business (and this is frequently the case) an agreement may facilitate estate and tax planning.
Certain businesses must meet securities laws requirements restricting ownership and transferability.
In family owned businesses, it is permissible to restrict ownership in a business to a family or other closely defined group.
You may want to assure the owners that tax distributions will be made in the case of pass through entities so owners have the cash to pay taxes.
But, as you consider the terms that best suit your circumstances for an Owner Agreement, be wary of restrictions that inadvertently “trap” business partners together who are no longer compatible. If relationships among owners have deteriorated, the business prospects frequently follow suit. The sooner and more smoothly business owners can part ways on an economically fair basis, the better off all parties will be.