14 Key Points to Consider When Forming a Business

Professionals and entrepreneurs often give less attention to the agreement with their fellow investors or colleagues to start a business than they do to their customers, clients, suppliers and bankers. However, this can be devastatingly wrong.  A typical scenario involves one person supplying the money and the other providing the experience, know-how and sweat equity. Some of the key points to consider before drafting an agreement:

  1. Who will have the final say? Many LLCs are written as 50/50 deals. What happens when there is a disagreement?

  2. Can the two of you compete with each other by way of another business or with the business being formed?

  3. Will the business you have started use a business set up by one of you to supply goods or services? What guarantees of fairness do you want if that will happen?

  4. What will happen if one of you dies, becomes disabled, gets divorced, goes bankrupt or has a judgment entered against him or her?

  5. If the company runs out of money, are either or both obligated to invest more? What happens if one of you refuses to do so?

  6. Can one of you buy the other one out without consent from the other?

  7. If there is a buyout, how will the price be determined: by the book value, by an appraiser, by three appraisers, by annual agreement?

  8. In the event of a disagreement, will the court system (with or without a jury) or arbitration be specified to decide the matter?

  9. If the two of you reside in different cities, where will any dispute be heard?

  10. Who will have control over the books and records? Will reports be generated and, if so, how detailed and how often?

  11. Are distributions guaranteed or discretionary, and at whose discretion?

  12. Have all the known facts regarding the business been disclosed?

  13. Do you want to have the entity formed in Illinois, Delaware or some other state?

  14. Do you want to treat each other like partners (whereby you each owe a fiduciary duty to each other- that is one of trust and loyalty) or as arms-length business associates whose relationship is governed primarily by the terms of your written agreement? Do you want the written agreement to reflect all of the terms and conditions you have discussed and agreed upon?

Before entering into a business arrangement such as starting a new business or buying into an established business, you need to have a heart-to-heart chat with your new business colleague, even if you have been friends or colleagues for years.  In the event of a dispute, you should consult a lawyer right away. The agreement between you and your colleague and the provisions of statutes governing the business being formed are probably both relevant. Once the above key points are decided, the choice of whether to form a partnership, corporation or LLC will be easy.

 
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