Professionals and entrepreneurs often give less attention to the agreement with their fellow investors or colleagues when starting a business. However, this can be devastatingly wrong. Typically, someone supplies the money and the other contributes the experience and know-how. Here are some considerations when forming a business:
14 Considerations When Forming a Business
- Who will have the final say? Many business owners write LLCs as 50/50 deals. What happens when there is a disagreement?
- Can the two of you compete with each other? Can you indiviually form another business?
- 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?
- What will happen if one of you dies, becomes disabled, gets divorced, goes bankrupt or has a judgment entered against him or her?
- 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?
- Can one of you buy the other one out without consent from the other?
- If there is a buyout, how will the price be determined: by the book value, by an appraiser, by three appraisers, by annual agreement?
- In the event of a disagreement, will the court system (with or without a jury) or arbitration be specified to decide the matter?
- If the two of you reside in different cities, where will any dispute be heard?
- Who will have control over the books and records? Will you generate reports and, if so, how detailed and how often?
- Are distributions guaranteed or discretionary, and at whose discretion?
- Have you disclosed all the known facts regarding the business?
- Do you want to have the entity formed in Illinois, Delaware or some other state?
- Will you 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?
Be Sure to Communicate
Before entering into a business arrangement, you need to have a chat with your new business colleague, even if you have been friends for years. In the event of a dispute, you should consult with a lawyer right away. Your agreement and the provisions of statues governing the future business are probably both relevant. Once you decide on the key points, the choice of forming a partnership, corporation, or LLC will be easy.
If you have a business or partnership dispute, call (312) 223-1699 or click here.