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Owning a business comes with all kinds of issues  
April 15,  2022
Owning a business comes with all kinds of issues
          Owning a business comes with all kinds of issues.  Probably the biggest issue for a signal owner business is thinking about an exit strategy.  When a business is owned by two or more people they have the exit strategy issue and lots of other issues that a single owned business owner doesn’t have to consider because he has no one else to deal with.  It’s these other issues that I want to cover in this article, and you will quickly see why they apply when the business is owned by more than one owner.  These considerations are certainly not exclusive, nor are they in order of priority.
          Control:  Someone has to be in charge.  Majority rule or unanimous consent are two options, but sometimes one person needs to be able to make decisions without calling for a board meeting. Are all to be Directors and who are to be the officers?
The stockholder agreement [or Operating Agreement if it’s an LLC] should address this issue. 
          Employment:  Are all shareholders entitled to work for the business?  Are all shareholders required to devote all or any of their time to the business and are they restricted from competing or even working in other businesses?
          Compensation:  If all owners work for the business are they entitled to equal compensation or is there some other criteria for calculating and fixing compensation among owners?    Besides money are there any other perks that one may be entitled to but not others?
          Capital contributions:  Do owners need to invest money or sweat?  What if more money is needed, will they be required to contribute more and what happens if one or more can’t? 
          License holder:  Is one of the owners committed to getting and maintaining a license for the business and on what terms and conditions?
          Disability:  What happens if a working shareholder gets disabled and isn’t able to perform?  How long does a disabled shareholder get paid and retain his perks?  Should the disabled shareholder be required to tender his shares for sale?  Should the corporation be required to buy those shares, and at what price and for what payout?
          Death:  What happens to an owner’s interest if he dies?  Does the interest pass to his heirs or does the interest have to be sold to the corporation [or remaining shareholders] and at what price and what payout? 
          Retirement:  What if an owner wants to retire, should he be permitted to require the corporation or remaining shareholder(s) to buy him out, at what price and what payout?  What if there are three or more shareholders and the majority of shareholders want to require an owner to retire from the business?  Should they be permitted to require the other shareholder to sell to them or the corporation and at what price and what payout?
          Purchase price of interest in business:  How is it to be calculated?  Will there be a fixed price or formula for fixing the purchase price?  Will the owners agree on an annual or other periodic period what the value of an interest is?  Should the purchase price calculation be different if the buy-out is because of disability, death, forced purchase [Put] or forced sale [Call]? 
          Disability and death insurance?  Will it be carried and who should pay for it?  Will the policies cap the purchase price? 
          Disputes:  How will disputes in operation be handled?  Majority rule?  What if there are only two owners and they are deadlocked?  Will there be events that trigger required dissolution and who should be the person in charge of the winding down of the business and entitled to be appointed Receiver of the business in the event of a judicial dissolution?  Will the forum be set and will alternate dispute resolution [arbitration] be required?
          I think it’s fair to say that two or more people going into a new business, all acting in good faith, don’t really want to think about any of the above issues; the issues are too negative and that’s no way to enter into a new venture.  But unfortunately things happen, and some of the things are definitely going to happen eventually.  The familiar wording in a stockholder or operating agreement is “the parties wish to provide to certain contingencies that may arise from time to time”, and it is certain that one or more of those contingencies are going to arise.
          There are essentially two opportunities to enter into a shareholder agreement:
  *  when the parties are friendly, cooperative and optimistic
  *  when things are not going as expected and disagreement arises between the owners
          Why don’t you think about the best time to enter into an agreement is, and give me a call when you’re ready.

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301