This is the next post in my series on the drafting of corporate bylaws and business agreements for companies in Olympia and Tacoma Washington. My last article discussed why companies need properly drafted business agreements. Not having the rights and obligations of all the partners clearly spelled out can result in disputes over liability, ownership, the sharing of profits, and other matters, which could impact the business’ growth and lead to avoidable losses. We strongly suggest that you consult with a business law attorney when negotiating and preparing your company’s initial documents. In this article I will discuss several points entrepreneurs should consider as part of the business formation process. If you require assistance then contact my office today to speak with a lawyer.
First, when drafting a company’s bylaws, think of future plans and possible future expansion. Too many entrepreneurs and startups draft their agreements on the basis of how they are operating at the time of formation. This can limit future growth. To deal with expansion, the agreements should address the circumstances under which new owners, partners, or investors can join the company. Good documents address how new individuals, including those with new expertise, can be brought into the company. This approval process should minimally address (1) the extent to which other owners may have their stakes reduced or diluted, (2) the minimum capital requirements for potential investors (or the formula for calculating that), and (3) whether and how dissent by current owners is handled.
Second, your initial documents should address and allocate actual and potential business liabilities. New companies typically have difficulty in obtaining credit, leases, or specialized service contracts. This because most new companies fail within their first two years and potential lenders, landlords, and specialty contractors know that. Founders of new businesses often have to guarantee essential contracts with their personal credit. This means that those founders can face personal liability if the business fails, losing the primary benefit of having a separate entity business – liability protection (corporate shield) – at least with regard to these essential contracts. A properly prepared set of company bylaws can spell out the extent to which owners must reimburse each other for personal guarantees, and how newcomers to the business can compensate the founders for the risk taken on by those founders. This allows the owners to equitably share risk and to protect themselves and their families in the event that the business fails.
Properly drafted agreements can also include clauses as to how the business will be shut down and dissolved if the owners decide to go their separate ways. If an owner leaves the business, or dies or becomes incapacitated, or if the owners decide to shut down completely, it is important to have a process in place as to how to value and divide the company’s assets (including intangible assets such as customer lists, pending contracts, trade secrets, and even customer or client relationships and goodwill) and how business liabilities will be settled. Not having an agreed process in place greatly increases the cost of business separation or dissolution, possibly even presenting the risk of extremely expensive litigation. Finally, it is often easier to come up with a truly fair process for dividing risks and liabilities in advance, while the issues are abstract and not readily calculable.
If you are forming a new enterprise, it is important to consult with an attorney help you think through and understand the issues which you may be facing. Counsel will help you to consider matters which may not even be on your radar. This, in turn, can help you to develop a structure that endures into the future as well as meeting immediately needs. As an Olympia business law lawyer, I assist with the formation of companies in addition to the drafting of corporate bylaws and agreements. Contact my office today to schedule an initial consultation.
Our firm also serves the Thurston County cities of Lacey, Tumwater, and Yelm, the Pierce County cities of Tacoma, Puyallup, and Lakewood, the Lewis County cities of Centralia, Chehalis, the King County cities of Seattle, Auburn, Bellevue, Burien, and Federal Way, as well as other areas in Washington, including Grays Harbor, Mason, Cowlitz, and Pacific Counties.