Start-up business owners benefit from creating an ownership agreement, a contract between business owners. The agreement should state the owners’ rights and responsibilities. One important aspect of ownership agreements is determining how ownership changes will be handled.
At Jones, Gregg, Creehan & Gerace LLP, we provide skilled legal counsel for Pittsburgh business owners. We can help you create foundational business documents, including ownership agreements. Creating an ownership agreement can help owners maintain a positive relationship, manage expectations, and grow the business in profitability.
The Benefits of Creating an Ownership Agreement
Creating an ownership agreement is a proactive step that provides multiple benefits. This written agreement acts as a shield, protecting both the owners and the business. It outlines the procedures to be followed if an owner is the target of a lawsuit, gets divorced, goes into debt, or faces other legal or financial difficulties. With such a contract, the business could avoid ending up with an unqualified, unwanted, or even hostile individual as an owner.
Resolving Disputes Between Business Owners
When starting a business, most owners share a vision for the future of their company and get along with each other. However, as time goes on, disputes can arise. Some disagreements can be resolved relatively easily, while others can escalate and cause harm to the company. An ownership agreement with action steps for future deadlocks can be a crucial tool in protecting the company and maintaining business harmony.
What Should Be Included in an Ownership Agreement?
When two or more individuals start a business together, it’s smart to draft a legally enforceable ownership agreement with the help of a business attorney. An ownership agreement is a legal contract between two company owners that addresses how the owners will manage the business. Addressing issues that could arise between the owners upfront can help the business run smoothly.
At Jones, Gregg, Creehan & Gerace LLP, we take time to get to know our clients and understand their unique situation as business owners. When drafting your ownership agreement, we will tailor it to reflect the expectations of the ownership group.
Defining the Rights and Responsibilities of the Owners
The ownership agreement should state whether the owners have the same rights and responsibilities. If they are different, the agreement should state how they are different. Their roles, investment amounts, or buy-in dates may differ, resulting in different rights and responsibilities.
The agreement should also state whether owners have the right to own other businesses or act as advisors or board members of a competing business. It needs to state exactly how investors will be added to the business and in what capacity. It should clearly state what steps must occur if one or more owners retire, pass away, or become incapacitated.
Stating Who Can Make Management Decisions
The owners’ agreement should clearly state which owner or owners will handle daily operations and who has the authority to make specific types of decisions. Will managers be hired, or will the ownership group control business operations? All owners should clearly understand how decisions will be made, whether unilaterally or by a unanimous vote of all of the owners. It should also address who can make a decision about dissolving the business.
Ensuring Owners Stay Vested in the Company
The ownership agreement plays a vital role in ensuring the business’s success by outlining what will happen if an owner or key employee leaves the business. It prevents a situation where an owner who has harmed the business maintains their ownership share after they leave, protecting the business from potential harm.
The ownership agreement should also describe what will occur if the business is merged and sold and how transfer decisions will be made. It’s also important to address what will happen if the owners decide to dissolve the business. The agreement should clearly describe the steps owners can take to end their arrangement and any requirements or limitations.
Determining How the Owners Will Be Compensated
The owners’ agreement should state when owners can withdraw money from the company and the amount they can withdraw. It should also state how owners can take money from the company. This clause should detail how the owners will share in the business’s profits. Some owners may have priority in receiving profits over others. The agreement should also state whether profits will be paid via distributions, dividends, or salaries.
The Difference Between Ownership Agreements and Other Business Agreements
Ownership agreements are separate from LLC operating agreements and corporate bylaws. While bylaws and operating agreements may address some of the same topics in the ownership agreement, they are primarily intended to address the internal management and day-to-day operation of the business. On the other hand, ownership agreements focus on the business owners’ professional relationship.
Ownership agreements are also different from buy/sell agreements, which are legally binding agreements related to the purchase or sale of a business. Buy/sell agreements state how an owner’s share(s) will be reassigned if the owner leaves the business, becomes incapacitated, or passes away. Ownership agreements describe precisely how the owners’ relationship will be managed during the operation of the business and after they are no longer a part of the business.
Contact an Ownership Agreement Attorney in Pittsburgh
At Jones, Gregg, Creehan & Gerace LLP, we understand how busy owners are with the day-to-day tasks of starting up a new business. Creating an ownership agreement helps business owners protect their legal and financial interests when they start their new businesses. Contact Jones, Gregg, Creehan & Gerace LLP to learn more.