Member or Shareholder Agreements

The Shareholder or Member Control Agreements

A member control agreement is a document that lays the framework for the way 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. 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 break-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:

  1. Speed and clarity
  2. Intact business relationships and friendships
  3. Intact reputations and
  4. 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 are essential:

  • 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.

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

If you are seeking legal representation or need information about our services, contact our office today. We support clients throughout the Twin Cities metro area. You can reach an experienced lawyer at 651-204-7152.