Entering into Partnerships, Shareholder and LLC and LLC Arrangements: A Primer

Entering into Partnerships, Shareholder and LLC and LLC Arrangements: A Primer By Ian LifshutzWhen entering into the simplest of business deals with a partner, or group of partners in any corporate structure, such as partnerships, LLCs, shareholders, or corporations, many overlooked issues can arise.

Of particular concern are businesses related to ownership and operation of real estate or other physical assets. In these situations, the consent of only one of the owners is needed to transfer or sell an asset. Although there would exist a private right of action against an owner who engages in self-dealing at the expense of the partnership/corporation/LLC, the transaction may not be able to be set aside if the transferee/purchaser was acting in good faith. Even when fair market value is exchanged, such an action could go against the very purpose of the partnership/corporation/LLC’s intended purpose to begin with.

Parties need to clearly lay out in an agreement a very specific set of guidelines and concerns for operating, transferring assets, and handling bank accounts and tax matters. Often these simple factors, such as who can come in as a partner, member or shareholder, are overlooked.

It is also very important to lay out these concerns as many entities, such as corporations, allow free transferability of stock and interest in the corporation or LLC, which can lead to an unfamiliar partner in the deal. This can cause significant problems, especially if there is no clearly laid out guideline. It can also create problems with voting. This is often remedied by creating consents and a proper guideline for the operation of the business.

It is crucial to lay out which owners can sign checks and for which amounts, and whether certain amounts require additional consent of other owners. This would be to help protect against looting of any bank accounts. Certain assets such as Intellectual property should have a clear plan and strategy for ownership and licensing. If the actions of any one partner tie up such an asset, it could be financially detrimental to the business.

In addition, it is typically preferable to determine how the partners will fund a buyout of any ventures, as estate laws can have stock or other ownership interests passed through an estate when one of the owners dies. This can create problems with a buyout or the addition of an unknown partner if the estate can freely transfer the ownership interest. It’s often common for partners or the entity itself to purchase life insurance on each of the owners to fund a buyout in the event of the death of any of them.

So often these issues are overlooked, which can lead to working relationship problems and legal disputes down the road. These can be very costly, not only in terms of money spent, but in aggravation for the individual owners. It can also create problems for the day-to-day operations of the business itself, if the business is not being actively and efficiently operated.

Has your business entered into partnerships or shareholder arrangements? Were you happy with the results, or did trouble ensue?

Ian Lifshutz

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