The 10 Best Tips to Avoiding Business Ownership Disputes
Business disputes can be costly and, in some instances, can be catastrophic for the owners of all types of businesses. Whether you operate business as a corporation, limited liability company, partnership or other business entity, these 10 tips for avoiding a partnership or shareholder dispute can help your business run smoothly for decades!
Have a clear shareholder/partnership/operating agreement (“owner agreement”).
Make sure you have a properly drafted shareholder (corporation), partnership (partnership/limited partnership), or operating agreement (limited liability co.). It should identify and list out the owners’ rights and obligations. It should also include the procedure to follow if a dispute arises. Make sure the read, understand and comply with the agreement. If you do not have an owner agreement and a dispute arises, it will be difficult to compel the other side to negotiate a resolution. In this situation, a deadlock between the owners can arise. If a deadlock occurs, the business may not be able to operate which could be very harmful to the business. This includes shareholder derivative actions.
Document clear policies on distributing profits, salaries or other compensation.
It is wise to have clear policies on distributing profits and paying salaries or consulting fees. If you already have written guidelines, be sure to follow them. To determine what policies will work best for your company, discuss these issues and ideas with the other owners and with other professionals, like the company accountant. Once finalized, the policies should be implemented and followed regularly. If written guidelines are agreed to and implemented, there will be precedent and written guidance should a dispute arise. Following reasonable written guidelines can also help if an owner that is not involved in the day to day running of the company objects to the way profits are being distributed or has other financial concerns like payment of dividends, salaries or other expenses. It is also important for management of a company to understand their obligations to the company.
Establish clear guidelines on when owners can take time off.
In private companies, disputes can arise when one owner feels like they are working harder than another owner. Having a clear policy is important because owners should have the ability to take time off. This includes vacation time, sick time or other types of leave.
How to treat non-management owners.
Frequently, a dispute arises when an owner has been excluded from management. The roles and duties of all owners should be well documented. Who is to be involved in the management? Who is only a passive investor? What are their respective rights and obligations? These roles are particularly important to clearly determine as it relates to decision making authority, board meetings, as well as hiring and firing.
The interests of the company must always come first.
Directors have a duty to act in good faith and in the best interests of the company. This is commonly known as their fiduciary duties. Disputes can arise where a director starts putting their own interests first, which is often at the expense of the company and shareholders as a whole. There must always be a commercial reason for a transaction – for example, you should avoid the temptation to loan funds to another business if there’s a chance the funds won’t be repaid, and the company loaning the money will therefore be disadvantaged. Before entering into any related party transactions, always ask yourself: is it in the best interests of the company as a whole?
Keep detailed and proper records.
Good business and corporate governance require keeping detailed records. Another reason to keep detailed records is so that there is evidence to support your position in the event that allegations are made against those in management. Your case will be much more compelling if there are documents that support your oral evidence. Under the Business & Professions Code, the owners of companies have the right to access the books and records of the company. Providing these records to all those entitled on a regular basis can help avoid owners complaining that they are not being given all the information related to the operations of the company.
Communication is key.
As with all relationships, communication is vital. The earlier and more often the better. It is better to address issues immediately, before they become bigger issues. The larger the issues become, the more difficult it can be to get everyone to the table to work it out if emotions get into the mix.
Use company funds in the event of a dispute.
A common allegation in shareholder disputes is that the defendant has used the company funds to defend the dispute. There are instances when company funds can be used to defend a lawsuit, but when owners are involved, the issue can get tricky. Get advice before simply using company funds to pay for your lawyers. Making the wrong decision here can be very costly!
Owners should address succession planning early.
Ownership disputes often arise if there is a breakdown in the relationship between two or more owners, or if control of the company is handed down from one generation to the next. Early succession planning and regular communications between shareholders and potential future shareholders will minimize the chance of a dispute arising.
Seek legal advice early.
What do they say? “An ounce of prevention….” Yes, is applies here. It is smart to seek legal advice at an early stage. Lawyers who have experience in these types of disputes have seen similar situations before and can provide important strategic advice. Avoiding a full-blown lawsuit can be the difference between a company surviving intact as opposed to significant financial losses and pressures.
Getting Legal Help
Brown & Charbonneau, LLP’s award-winning business and trial attorneys represent large and small companies as well as individuals in cases involving all forms of business disputes and general business and corporate matters. If you are involved in a business dispute, or would like to learn about your rights and how to protect your business, we can provide you with the information you need. Contact us or call today at 714.505.3000 to schedule a consultation and learn more about how we can help you.
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