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Partnership Matters #3: Avoiding Messy Exits

by Michael J. Klinker, posted Thursday, October 14, 2010

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Business partners often do not have equal shares of the business. There are often very good reasons for this. However, they should be aware that when the balance of power tilts one way or the other, there is potential for abuse.
 
In Wisconsin, on this issue, business corporations and LLCs are different. One often unexpected and important difference is the ability of a partner to unilaterally exit the business.
 
Law libraries have volumes dedicated to the topic of  the oppression of minority shareholders of business corporations. The oppression techniques that majority owners may employ have harsh sounding names such as "squeeze out" or "freeze out". The fundamental reason minority owners of a corporation may be "oppressed" by their business partner is that the Wisconsin corporate statutes do not allow them the unilateral authority to exit the business. If they want an exit by a means other than litigation, they must provide for it by contract. Many shareholders establish corporations without addressing this issue in a written shareholder agreement, and they may end up in messy litigation.
 
On the other hand, aside from a few limited exceptions, the Wisconsin limited liability company statutes provide members of a limited liability company the right to unilaterally withdraw and receive fair value for their membership interest within a reasonable time after the withdrawal. While the holder of a minority ownership percentage in an LLC may think that leaving the company in this manner is drastic, and getting out in this way has numerous uncertainties attached to it, it certainly does change the dynamic of the majority owner/minority owner relationship. The ability to oppress a minority owner is gone. However, if the ownership relationship is basically an at will relationship, it may be more volatile. Many LLC members establish LLCs without addressing this issue in an Operating Agreement and are subject to the risk of serious business disruption due to the unexpected exit of an owner.
 
When establishing your closely held business, it is wise to "Begin with the end in mind." Plan for exits, and put the plan in a written agreement.

 

Partnership Matters #2: If We Are Deadlocked, is the Business Dead?

by Michael J. Klinker, posted Wednesday, September 29, 2010

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Consider this common scenario. The business is owned 50%-50% by the two owners.  Their relationship becomes strained and they cannot agree on how to manage the company.  What happens?  In most governance structures, if there is a deadlock, nothing happens. As a practical matter it may be difficult or impossible for the business to: borrow money; lease space; hire a key employee or otherwise expand. Many business owners believe no growth is synonymous with a slow road to winding up and closing down.
Corporate and limited liability company statutes typically allow for a remedy in these circumstances, but it is drastic. An owner can go to court and ask a judge to order that the business be dissolved. Does this make sense in the case of a profitable business? Most people would find that to be a remedy of last resort.
 
This does not have to be the case. Agreements among business owners can provide various constructive means to resolve deadlock. The possibilities range from facilitative processes which have as their endgame a solution where the deadlock is solved and the owners remain together, to evaluative processes where the endgame is to have a buyout and the owners go their separate ways. Within these categories, there are numerous alternatives. Deadlock does not have to mean the death of the business.
 
In your business, what would happen if nothing happens?

 

Partnership Matters #1: Good Agreements Make Good Partners

by Michael J. Klinker, posted Monday, September 13, 2010

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When starting a new closely held business, clients often say, "I need a buy-sell agreement." Or, they may present us with an agreement found somewhere else and ask, "Is this a good agreement?" In either event, they skipped a step in the process. An agreement among owners (business partners) is a good agreement if it meets their expectations about what happens under different circumstances. While much of the attention is often focused on an owner's exit at some point in time, many things can happen along the way. An important first step is to think about the entire life cycle of the relationship and how it should work.
 
Clients should consider three broad categories of issues: (1) formation; (2) operation and governance; and (3) the exit. 
  1. Formation issues relate to what each partner contributes and what do they get for that contribution. Does everyone contribute cash? Do people contribute other tangible or intangible property? What about a contribution of services? Are owners required to fund future operations through additional capital contributions? What percentage ownership does each partner receive?
  2. Operational issues are about decision making. Who gets to decide things? Do you require a majority or unanimous vote? Is the authority to decide different for smaller issues than it is for bigger issues? How do you resolve deadlocks or tie votes?
  3. Finally, the exit issues should take into account (1) the identification of what events trigger an obligation or an option to exit the business; (2) what is the price or how is price determined; and (3) the payment terms. 
These issues are the same whether the business is formed as a partnership, corporation or limited liability company. Answers can vary widely based on people and circumstances. We find that business partners who take the time to consider these issues have agreements that meet their expectations and enjoy a more stable business relationship. How complete are your agreements with your co-owners?

 

Partnership Matters: A blog on legal topics concerning business partnerships

by Michael J. Klinker, posted Sunday, September 12, 2010

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"Partnership Matters" is a blog for postings and comments about legal topics and recent developments concerning business partnerships. By business partnerships, we mean all closely held businesses where the number of co-owners is small and the practical and legal expectations of the owners are more specific and customized. As a legal matter, these relationships may be established as partnerships, limited liability companies or corporations. 
 
A successful business relationship is one that meets the expectations of the parties. Business partners often have expectations of each other beyond the initial contribution of money. Successful and effective business partners seek to define and articulate those expectations on an ongoing basis. They also build companies with structures that can accommodate change over time. Ultimately that change may involve ending the partnership. This blog will address the many topics related to these issues from a legal perspective.
 
All Partnership Matters blogs postings are part of our Corporate Transactions & Business Acquisitions blog.

 

Illinois to Allow the Organization of Low-Profit Limited Liability Companies

by Douglas A. Pessefall, posted Friday, January 15, 2010

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Effective January 1, 2010, Illinois will begin allowing the organization of low-profit limited liability companies or L3Cs.  An L3C is a hybrid business structure that offers an alternative to for-profit and nonprofit companies by combining the pass-through tax advantages of a traditional limited liability company with the social advantages of a nonprofit. Michigan, Vermont, Wyoming, Utah and North Dakota have also adopted statutes allowing the organization of L3Cs.
 
The L3C structure also provides a vehicle for attracting investment in companies founded by social entrepreneurs who may be more interested in promoting social, cultural or environmental changes than making a profit.  Moreover, the L3C structure is intended to facilitate program-related investments (PRIs) by private foundations in for profit companies.