What Shareholders, Partners and Members Can Do to Help Avoid a Business Dispute
Even in the best of circumstances, conflict can occur between shareholders, business partners or members in an LLC, and sometimes these partnerships or relationships will need to come to an end. The best way to avoid a business dispute, such as a partnership or shareholder dispute, in Texas, is to prevent one from the outset of your business relationship. What this means for corporations, partnerships and members in a limited liability company is addressing legal, written contractual agreements that include instructions for handling admission and withdrawals, operational procedures and employment agreements that protect the business should a shareholder, partner or member leave.
If left unaddressed, common causes of business disputes in Corporations, LLC's and Partnerships include:
- Allocation of profits, losses, and draws
- Lack of definition of responsibility and authority
- Differences in management style
- Workload imbalance
- Voting rules for decision-making
- Buyouts or transfer of ownership
- A partner or member not acting in the best interest of the business including breach of fiduciary duty, fraudulent transfers and/or theft of trade secrets
- Misappropriation of business assets or property
- Disagreements on company objectives or company direction
- Shareholder oppression by form of squeeze-outs or freeze-outs (in a closely held business)
To Avoid Business Disputes - Governing Documents and Operating Agreements Businesses Should Consider Include:
For Shareholders in a Corporation:
- Certificate of Formation: Primary document that regulates the corporation’s activities including its powers and objectives
- Corporate Bylaws: Defining and regulating internal management and affairs including entitlements to dividends and procedures for board meetings
- Shareholder agreements: An agreement or arrangement whereby shareholders in the company define how the company will be operated and what the shareholder's rights and obligations are, the ownership of shares, management regulations,and the protection and privileges of the shareholders.
For Members in a Limited Liability Company (LLC):
- LLC or Company Operating agreement: Addressing admissions, withdrawals, dissolution, Classes of interests or ownership, economic rights and distributions, management including powers of and/or limitations and Fiduciary Duties
For Partners in a General Partnership:
- Partnership agreements: Addressing admissions and withdrawals, contributions, distributions, ownership, responsibilities and authority, decision making, dispute resolution, dissolution, critical developments, governing rules for buyouts and transfers
To Further Avoid Business Litigation - Other Contractual Agreements Businesses Should Consider:
- Buy-sell Agreements: With respect to settling a shareholder, partner or member’s share of the company due to his death or termination (either voluntarily or by force). In either situation, buying or selling, guidelines will need to be established to address in what way a new shareholder/partner/member can be admitted (by unanimous vote or majority - and through a purchase of interest or contribution of new assets).
- Restriction agreements: Establishing limitations on transfers of ownership
- Separation agreement: Process of terminating an owner or partner from all governing documents, including IRS business identification forms (EIN), By-laws, Articles of Incorporation or Articles of Organization, Operating Agreements, credit lines, leases, and Merchant Accounts.
- Confidentiality agreements & Non-disclosure agreements: Most businesses possess various forms of intellectual property and unique, sensitive information by way of trade secrets. Both Confidentiality & Non-disclosure agreements are similar in nature, and are legal contracts that require confidential information be kept confidential.
- Non-compete agreements: Non-Compete Agreements lessens the possibility that knowledge gained by an employee or business partner will be used in the future to compete against them for a reasonable length of time and geographic area.
Wherever financial interests are shared, there is potential for serious conflict. When business relationship rights are properly recorded, conflict can often be contained and resolved effectively to prevent business disruptions, lost value, and above all, litigation.
Our Houston Law Firm Can Help! Call (713) 909-7323 to Schedule a Consultation
At Hendershot Cowart P.C., our experienced business attorneys have been drafting partnership and shareholder agreements for over 26 years. Our law firm provides full-service counsel to startups and existing businesses going through transitions, mergers and acquisitions. If you have questions about our litigation team and how we can be of service to you, contact us for a confidential consultation. We serve clients from solo entrepreneurs to large, international businesses throughout Houston and the state of Texas. To get started, call (713) 909-7323 or contact us online 24/7.