Many new businesses set up their company’s organizational documents and see that they cover the basics: ownership, voting and business purposes. But there are some less immediate but equally important considerations: deadlock, capital calls and restrictions on transfers. A good company agreement should cover these additional considerations.
Many new businesses are set up with a set of business partners that own the business equally. A obvious potential problem is what happens when the partners reach an impasse on operating issues? An impasse on big issues like lending, borrowing and acquisitions can result in your company being stuck and unable to move ahead. Having a deadlock provision in your company agreement can be a big help. Common ways to resolve a deadlock is a mandatory mediation or arbitration provision, the appointment of a trusted advisor to cast a tie-breaking vote, or even a coin flip. The mechanics can be elaborate or simple, but, either way, addressing the possibility of deadlock is essential to a forward-moving venture.
Even though initial capital contributions are often covered in an entity’s organizational documents, it is not uncommon for those contributions to be underestimated and for capital calls to be necessary at some point in the company’s future. Having a clear way to address capital calls that is fair to all owners is key. Some agreements say additional capital contributions are not required. Other agreements provide a manner for one owner to advance a capital call after the other owners are given an equal opportunity to participate. There are many ways to address a company’s future capital needs within your company agreement. Figuring out the right way for your company will take careful consideration and guidance.
Circumstances that trigger transfers of ownership interests are inevitable – death, disability, divorce, bankruptcy, withdrawal. Your agreement should carefully cover all of these possibilities and clearly state what happens to the affected owner as well as those left behind to run the business. Restrictions on transfers under these events must be carefully crafted to protect the company and the overall ownership vision of the initial owners.
Every successful business encounters these issues over time. A carefully crafted company agreement can help navigate through the issues and allow for the continuance of a healthy business enterprise for generations to come.