If there’s more than one owner of your company, do you know who owns what? Because the answer often isn’t simple.
Many startup owners set up a limited liability company or corporation but forget to formalize the details after doing so. For example, they informally agree between themselves that the company is owned 60/40. Yet nothing is ever done to make that a fact.
This creates a nightmare situation for income purposes, buying or selling equity from each other, or bringing in a new partial owner of the business. It’s also common for one co-owner to believe he owns a majority of the company. However, the other co-owner claims it’s 50/50 if there’s a fundamental disagreement on how the business should be run.
So, what’s the solution?
Putting the right paperwork in place from the beginning so each owner knows how much they own plus their voting rights. For example, if equity is split equally, chances are you’ll want a tie-breaker provision in place that designates the ultimate decision-maker if there’s a stalemate.
For a limited liability company, it’s relatively easy to solve these issues in the members’ operating agreement.
It’s slightly more complex with a corporation because the paperwork may involve corporate bylaws, corporate resolutions, and a shareholders’ agreement.
Regardless, it’s not something that should be punted until it becomes a major problem. Prevent the issues on the front end by putting the right legal documents in place to reduce the dangers of upset co-owners, lawsuits, and tax penalties.
If you need help, it’s probably time to schedule a phone consultation with Business Lawyer Mike Young.