If you are entering into a business venture with multiple people – regardless of whether it is a general partnership, a limited liability company (LLC), a corporation, or another type of entity -- it's important that you have a written, organizational agreement in place that clearly outlines the rights and obligations of each person involved. The agreement should address potential issues and disagreements that may arise down the road and help set the expectations of those involved. A well-crafted agreement will help to ensure that everyone’s expectations are met, minimize the risk of disputes and set your new business on a successful path.
Ideally, you should create your organizational agreement at the time you establish your new business. This will help to ensure that all of the parties involved share a common vision and set of expectations for the business as you embark on your new venture. Organizational agreements are like preventative maintenance on your car. The cost of preventing a dispute by preparing a thoughtful organizational agreement is often minuscule compared to the cost of resolving a dispute that arises where no agreement exists, or where the existing agreement is poorly drafted.
When it comes to organizational agreements, one size does not fit all and it's important to work with an experienced business law attorney who can guide you through the process, make sure important items are addressed and that the agreement meets the specific needs of each of the parties involved.
Some of the important issues that should be covered in your organizational agreement include:
- Each owner’s individual investment amounts - This may not always be a monetary investment. It may also include the value of labor, the value of providing the building or other real estate used by the business, as well as the value of any equipment required to run the business.
- Division of labor –Will owners take on management duties for the new business, and if so which owners? Determining the role each owner will play in the business is crucial to setting your venture up for success, and it will help reduce the risk of future disputes.
- Profit sharing - Every owner will expect to eventually make a profit once the business has become successful. Your organizational agreement should outline how profits will be distributed among the owners, and whether a percentage of these profits will be reinvested into the business. Your agreement should also spell out whether managing owners receive a salary.
- Financial management - Your agreement should address how financial decisions are to be made and whether special rules should apply to certain financial decisions such as real estate transactions.
- Rules for managing decisions-The terms by which decisions are made is a crucial item to be covered in your organizational agreement, and it can significantly impact the success of your business should a dispute arise.If all of the owners understand and accept the rules for how decisions are made, the likelihood of a costly dispute over business decisions is significantly reduced.
- How to deal with changes to the business ownership - At some point in the future, one of the owners may decide to move on and want to leave the business. Your business may also grow and evolve over time, requiring the addition of new parties. Your organizational agreement should outline how these situations will be handled. This may include the buy-out process for an owner who leaves as well as any potential buy-in required of a new owner.
The business law attorneys at Hoover Penrod have decades of experience crafting organizational agreements for businesses in the Harrisonburg area and throughout the Shenandoah Valley. Our lawyers will help you and your co-owners spot the important issues, suggest ways to deal with those issues, and ensure your final agreement protects each owner’s rights while setting your new business up for long term success.
Please contact Hoover Penrod using the form on this page or call 540-433-2444 today to schedule a consultation with one of our business law attorneys. We serve clients in Harrisonburg, Staunton, Winchester and the surrounding areas of Virginia.