Operating Agreements

There is no legal obligation for an LLC to create an Operating Agreement, but any experienced business lawyer will recommend one. Creating a strong LLC Operating agreement  at the time the Company is created will prevent many problems that could occur later. In particular, a detailed and objective Operating Agreement provides solid evidence that the business really is separate from the owners’ personal finances, making it less likely that a court will later determine that the LLC was really operating as a proprietorship.

A well drafted operating agreement will determine:

• The owners and their respective shares of the company as well as their respective rights as to profits and losses
• The respective owners’ voting rights on matters important to the business
• How and when the business will conduct meetings
• What happens when one or more of the owners decides to leave the business (who has buyout rights, under what conditions, and so on)

Shareholders Agreements

A Shareholders Agreement establishes the rights and responsibilities of all shareholders who own a share of stock in a public or private corporation and describes how the company should be operated. If your company has multiple shareholders, it is recommended you implement a Shareholders Agreement. KingBarnes will help your company draft a Shareholders Agreement so your business can run as smoothly as possible.

Typical issues covered in a Shareholders Agreement may include:

• Who can serve on the Board of Directors and as an officer, as well as procedures for each

• What happens to a shareholder’s equity after death, disability or bankruptcy, which is known as a “buy-sell” provision.

• How a shareholder’s stock can be transferred or sold, including any restrictions on transfer. This might include “right of first refusal,” “drag-along” or “tag-along” provisions.

• How additional shares can be issued

• What corporate activities are subject to shareholder approval, and what percentage of shareholders must approve. Some activities may require a mere majority, while others a supermajority or even unanimity. These provisions may be of particular concern to minority shareholders.

• Valuation of shares

• How and when dividends are distributed

• How the company will be managed

• Non-competition obligations

• Dispute resolution

• Information rights of shareholders

• Preemptive rights, which, in the event the company offers additional shares, gives current shareholders the right to purchase those shares before the shares are offered to others

These are simply some of the many issues a Shareholders Agreement can address — and each of these provisions can be structured in myriad ways, depending on your current needs and future plans. KingBarnes, LLC walk you through the significance and consequence of each of these decisions and craft a shareholder agreement tailored to your business.

Buy-Sell Agreements

A Buy-Sell Agreement or Buyout Agreement governs the situation where one partner leaves the business. Sometimes called “business wills,” these agreements permit you to plan for the death, disability or other departure of your partners. Especially in closely-held corporations or family businesses, discussing and papering these contentious business succession issues early creates certainty during more challenging times, such as the untimely death of a partner. A well-crafted Buy-Sell Agreement can serve the interests of  both remaining and departing partners: remaining partners retain control and departing partners can sell what might have been an unmarketable asset. KingBarnes is here to draft your Buy-Sell Agreements and work with closely-held or family corporations.

If you decide to implement a Buy-Sell Agreement, here are a few of the decisions you and your partners will need to make.

• Triggering events. You will need to define when the Agreement is triggered. Examples of triggering events might include death or disability of a partner, voluntary or involuntary departure of a partner, bankruptcy, divorce (usually in the case of a family business) or retirement.

• Mandatory vs. Optional. A mandatory Buy-Sell Agreement will require the business or your partners to purchase your share; an optional Buy-Sell Agreement will commonly give a ‘right of first refusal’ to your partners, the business or third-parties (such as surviving spouses to by the shares).

  • Insured Buy-Sell Agreement. If you decide to go with a mandatory Buy-Sell Agreement (or in some cases, an optional one), you may also want to consider setting up life insurance policies for the partners, naming either the remaining partners or business (depending on the Agreement’s structure) as beneficiaries to finance the acquisition.

• Who. A Buy-Sell Agreement will obligate your partners to buy your stake (Cross-Purchase Agreement),  the business itself (Redemption Agreement) or a hybrid. KingBarnes will help you determine which of these options best fits your situation. If you decide to use a Cross-Purchase Agreement, you’ll want to define which partners have the right to purchase in what amounts, as it could shift control of the business.

• How Price is Determined. In the Agreement, you’ll want to set a methodology to determine price. KingBarnes will advise you on the different options so you can determine one that is sensible for your business and plans.

Because Buy-Sell Agreements often need to be executed during difficult times, it may be recommended to include a provision that would retain the services of a corporate trustee should the triggering events occur. Drafting a Buy-Sell Agreement with an experienced lawyer at KingBarnes early pays dividends, and will allow your business to run smoothly and with certainty if a partner departs. Contact our offices today.