Why is it important to focus on the operating agreement or shareholders’ agreement during and after the formation of an LLC or other corporate entity? Unfortunately, most new business owners and investors don’t fully understand the value of these corporate documents when forming a new company.
Key Takeaways of Focus on the Operating Agreement or Shareholders’ Agreement:
- The operating agreement, shareholder’s agreement and other important corporate documents including the by-laws contain important clauses that can make or break your new company.
- The important decisions relating to these corporate documents are most easily managed at startup.
- Money changes the way people think and behave, and when a lot of money is on the table I’ve seen otherwise good people make some really questionable decisions. I’ve pursued them as a plaintiff and defended them as well.
- The biggest mistake new business owners make is to attempt to download forms from some legal site or modify something they’ve found online.
The operating agreement, shareholder’s agreement and other important corporate documents including the by-laws contain important clauses that can make or break your new company. Why are these documents so important? Why is it so important to work with experienced San Diego business formation attorneys, even if you’re starting a small business or LLC?
Important Decisions Are Most Easily Managed at Startup
After more than 40 years of experience assisting with the formation of literally thousands and thousands of business entities I can tell you the important decisions relating to these corporate documents are most easily managed at startup. Focus on the operating agreement or shareholders’ agreement and the important details and clauses contained within these documents. Crucial decisions must be made regarding the relationship of the owners of the LLC, S-Corporation or C-Corporation, voting rights, the distribution of income and profits and ultimately how day-to-day decisions will be made.
It is important to discuss and implement strategies to manage what will happen if one of the members or shareholders experiences a significant health challenge including incapacitation. What happens if one of the key players passes away? What happens if one of the stakeholders must file for personal bankruptcy or face a divorce?
Most new business owners don’t value the high likelihood that a dispute will develop down the road between members or shareholders, and the strength of the operating agreement or shareholder’s agreement can limit or eliminate this risk and the tens of thousands of dollars that must be spent to resolve any subsequent dispute. How will ownership interests be valued if a member or shareholder must be bought out? Who has first right of refusal? Do you want a complete stranger or the ex-spouse of a member or shareholder suddenly appearing with half of their voting interest? Of course not.
Success Leads to Disputes
After more than 40 years of representing owners, members, shareholders and investors in business disputes, lawsuits and litigation I can tell you this: the more successful you are the more likely a substantial business dispute will occur. Money changes the way people think and behave, and when a lot of money is on the table I’ve seen otherwise good people make some really questionable decisions. I’ve pursued them as a plaintiff and defended them as well.
Focus on the Operating Agreement or Shareholders’ Agreement at Every Step of the Journey
This is why you must focus on the operating agreement or shareholders’ agreement for your corporate entity from the moment of formation through the life of your corporation.
After four decades of serving the business and healthcare communities here in San Diego and Southern California I can tell you the time and modest investment you invest in hiring the Watkins Firm to create your new business entity will return to you hundreds of times over, often in a relatively short period of time. The biggest mistake new business owners make is to attempt to download forms from some legal site or modify something they’ve found online.
Legal sites argue the “boilerplate” they provide fits all applications and saves hundreds of dollars. The reality is the Watkins Firm begins with our own proprietary “boilerplate” system for new business formation and simply tailor it to your unique circumstances in a cost-effective manner. There are more than 130 individual decisions which must be made to tailor these documents to you and your company. We guide our clients through each decision and provide insight based upon decades of experience with thousands of clients. We help you to understand the risks associated with each option, and how to tailor these documents to empower your company to come out strong, grow and prosper.
Pro-Tip: “We’re talking about privately held companies. When you invest in a company down the street, that’s not on the New York stock exchange, you still become a shareholder and shareholders have rights. First thing you should think about when you become a shareholder is like shareholders should be treated in a like or similar fashion. When you join a corporation by investing and you find out that someone with a similar shares as you is getting paid more dividends than you are, you are not going to like that. And you shouldn’t because that’s why we have different classes of shares.
That’s why we have those laws and rules. Also. You have to look and find out if there’s a shareholder’s agreement, which could define who gets what and who gets paid. What if you want to pay people differently than what their ownership is? Then, you should probably consider a limited liability company. But if you’re selling shares, you’re still subject to shareholder laws in the state of California and other places.
And those shareholders have a right to vote. They have a right to see certain disclosures. If you have over 5%, you get to see more financial documents of the company and you have a right to dividends. If other people are getting dividends, then you have a right to show up at the annual shareholders meeting. And if an investment represents more than 5% as a shareholder, they can go audit the company’s books and records.” – Dan Watkins, Founding Partner
We help you to understand every issue contained within the corporate documents when forming a new company and to make sound decisions that protect your new business now and in the future. The Watkins Firm also helps to regularly update these important documents as your business grows and changes. We invite you to review our podcast Episode 10 – The Importance of a Strong Corporate Attorney as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
