Gary L. White, Esq.
Florida Business Planning Attorney
Starting a new business can be both exciting and overwhelming. Unfortunately, important details sometimes get lost in the flurry of initial activity, and those oversights can leave business owners vulnerable.
A strong business requires a strong foundation, and that foundation is built through careful planning and clear legal steps. Some of the most important elements that may be overlooked or thrown together without appropriate guidance include business formation, shareholder and operating agreements, and buy/sell agreements.
Business Formation in Florida
While you may choose to operate your business as a sole proprietorship, that should be a conscious decision and not something that happens by default. Before you begin operations, you should thoroughly educate yourself about the advantages and risks associated with each type of business.
Limited liability companies (LLCs)
Each of these structures has positive and negative aspects. For example, a traditional partnership is simple to set up and has no added tax liability, but puts you at risk of liability for your partner’s bad decisions—or even unscrupulous actions. A C-corp, on the other hand, protects you from liability, but the corporation must pay taxes.
An experienced business formation attorney can walk you through each of the possible structures for your business and explain the costs and benefits of each. When you have made an informed decision, the attorney can work with you to ensure that your business entity is properly formed, and that you are aware of your legal obligations moving forward.
Shareholder and Operating Agreements
The type of business you form will dictate the type of agreement you need to govern operation of your business and the rights and obligations of members. A corporation will typically require a shareholder agreement, whereas LLCs do not have shareholders and thus employ operating agreements.
These agreements are often neglected, particularly when a newly-formed company is small and the principals have a pre-existing relationship. This neglect occurs for many reasons. Some of the most common are:
An effort to move quickly and/or to save money in formation of the company
A sense that the principals trust one another and don’t really need the protection of a detailed agreement
Lack of knowledge and understanding of what is necessary to create an effective, comprehensive agreement
However, disagreements do arise, even between people who never anticipated them. And, well-formulated agreements are much more than a safety net for conflict. A well-constructed shareholder or operating agreement will spell out exactly who is responsible for what, helping to ensure that misunderstandings and gaps don’t hurt the business.
An attorney experienced with shareholder agreements and operating agreements can do more than just draft a document for you. He or she will assess your business and your needs and raise issues you may have overlooked.
Buy / Sell Agreements
Buy / sell agreements are one of the most frequently overlooked elements in creating and maintaining a successful small business. A buy / sell agreement, also known as a “buyout contract,” provides that when one partner or shareholder leaves the business, his or her interest will be sold to the company or the remaining members. The agreement typically sets forth a formula for determining value and distribution, and is often paired with life insurance policies to ensure that the company has sufficient liquid assets to make the purchase.
Without this type of agreement in place, heirs of the deceased partner or member may refuse to sell, or lengthy estate administration may hold up the sale. The uncertainty and delay are problematic enough, but another issue arises when there is no buyout contract in place: there may be a conflict over valuation, and the remaining members or partners may be faced with a higher price than they were prepared to pay.
A carefully-drafted buy / sell agreement helps a business to remain stable during a difficult transition. The agreement also ensures that the business or its members can reclaim the interest of a departing principal, rather than risking sale of one party’s interest in the business to an outsider.