The Shareholder or Member Control Agreement.
A member control agreement is a document that lays the framework for how owners of a limited liability company (LLC) work together. It is an investment in your business, your friendships and your reputation. Among other things, a good member control agreement will address who owns what, how profits and losses are allocated, and how to exit and bring in new owners. If you are using a C Corp or S Corp, this document will typically be called a shareholder agreement. If your entity of choice is a partnership, then it would be called a partnership agreement. An LLC will have a member control agreement. Sometimes this document is referred to as a buy/sell agreement. Regardless, of the name or entity you chose, the advice below is applicable to all.
Before You Say "I Do" to Your Business Partner
Think of a member control agreement like a prenuptial agreement for your business. Some people feel squeamish about "prenups" because they acknowledge the possibility of a brake-up of what most people hope is a lifetime commitment. However, this is not the case in business. In business, owners do not vow to stay together "until death do us part."
A healthy business can and often should exit and welcome numerous partners throughout its lifetime. And, even healthy businesses have a life cycle with a beginning and end.
The process of exiting a business can be very similar to a divorce. The longer you have been together the messier it is and the harder it can be to split. Like spouses, co-owners often begin as friends, they share years of common experiences and relationships, there are memories (good and bad that build up over time). Additionally, like a marriage, the business' money and other property is presumptively communal. Owners also are bound by a common reputation of the company. When it comes time for an owner to exit, it is almost always more difficult than simply "cutting someone a check."
A Good Lawyer Adds Value to Your Business
A failure to carefully and thoughtfully plan for the eventuality of the exit of an owner can strain the best of friendships and business relationships. Solid legal counsel creates a road map that helps the owners exit a business with:
- Speed and clarity;
- Intact business relationships and friendships;
- Intact reputations; and
- Maximum value in business assets.
Could this Happen to Your Business?
Here are a few situations where an early investment in legal counsel, proper ownership planning and documentation can come in handy:
- one owner has another venture that takes off (leaving little time or energy for your company);
- one or more members' work performance fails to meet the others' expectations;
- the parties have different memories or understandings about how profits should be distributed or how to terminate a member (voluntarily or involuntarily);
- somebody "quits" (do you continue to pay them distributions from the company?);
- an owner passes away;
- there is a conflict of visions between the members of the company (i.e. members see different paths to growth or sustainability that are irreconcilable);
- the business requires additional capital contributions to either move forward or stay afloat;
- business becomes extremely profitable, but the amount of hours and work is no longer equitably distributed between the partners; etc.
I would note more often than not it is not somebody's fault when these things happen, but they always happen.
The profound benefit of carefully drafting a member control agreement before there is a problem is that it can preserve the invaluable relationships between the owners and often preserves the company itself from a premature death.
Contact a Minneapolis/St Paul Attorney Today
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