Small Businesses

Three Security Exemptions Founders Should Understand

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A large part of my practice involves assisting companies as they divide up stock amongst the founders and plan for how to best use equity to incentivize service providers, as well as selling securities to investors. Founders should be knowledgeable of securities exemptions under the SEC security laws that are likely to come into play… Read More

A large part of my practice involves assisting companies as they divide up stock amongst the founders and plan for how to best use equity to incentivize service providers, as well as selling securities to investors. Founders should be knowledgeable of securities exemptions under the SEC security laws that are likely to come into play as their company first forms and continues to grow. As all founders should be aware, every issuance of securities must be registered with the SEC unless a particular exemption applies. The three most common exemptions are discussed below.

“Founder’s Stock” and Rule 4(a)(2)

We should start by saying there is no such thing as “founder’s stock.” Rather, it is simply a term given to promoters and other insiders who work to form the company. In the end, it is simply common stock provided to those who played a crucial role in setting up the company.

Under Securities Act Rule 4(a)(2) an exemption from registering an issuance of securities with the SEC is carved out for transactions not involving a public offering, in which stock is sold to those who “take the initiative in founding or organizing the business” (See SEC Release No. 33-4552). However, even if you are selling shares to founders under this exemption, you must also file any necessary filings under “blue sky” laws, which in California tends to be a 25102(f) notice fling with the California Department of Financial Protection and Innovation.

“Reg D” Offering and Rule 506 (and the less commonly used 504 and 505)

A “Reg D offering” is a term used to describe a private placement offering that allows you to raise an unlimited amount of money from accredited investors under Securities Act Rule 506, or up to $5 million under Rule 505 and $1 million under Rule 504 during a 12-month period, and not register the offering with the SEC.

One important thing to remember is that a convertible note is considered a security and the company must comply with the proper SEC exemptions. The abundance of open source documents around convertible notes, and even series seed rounds, have caused many founders to think so long as they use those documents they are all set, and therefore, forget about complying with the rules that apply to a Reg D offering.

Under Rule 506(b) a company may raise unlimited funds from accredited investors and up to 35 non-accredited investors who are “wealthy and sophisticated,” provided the company does not generally solicit the offering, is available to answer questions from non-accredited investors, and provides audited financials.

The burden of providing audited financials (the type of financials required if you were registering the securities with the SEC) leads many startups to lean on Rule 506(c). Under 506(c) all purchasers must be accredited, which includes taking reasonable steps to verify they are accredited, but there is not the same requirement for audited financials.

Less frequent Reg D offerings include offerings that rely on Rules 504 and 505. These exemptions are less commonly used as they have limits on the amount raised, geographical restrictions, and increase the burden as to disclosures. Using Rules 504 and 505 can widen the investor base from which you can raise capital, but as a general rule of thumb the increased requirements around disclosures and the simple reality that taking money from someone who cannot afford to lose it makes using 506(c) the better option for most companies.

Much like stock issued to founders, even if exemptions apply for a private placement such that you do not need to register with the SEC, you must still look to satisfy blue sky laws within the state you solicit and sell securities within.

Incentivizing service providers under Rule 701

Under Rule 701 of the Securities Act, a startup is permitted to offer equity as part of a written compensation agreement to consultants, employees, and directors without having to comply with complex federal securities registration. In order to stay within the parameters of Rule 701, however, the total sales of stock during a twelve month period must not exceed the greater of (1) $1 million, (2) 15% of the issuer’s total assets, or (3) 15% of all the outstanding securities of that class.

Additionally, the offering of securities must not be included in any other offering of equity (such as for capital raising purposes as discussed above), and all optionees and shareholders must be given a copy of the plan under which the securities are being granted. If total sales exceed $5 million, additional disclosure requirements can come into play. Furthermore, just because the offering fits into an exemption does not excuse the antifraud provisions, which means any and all disclosures cannot be materially false or misleading.

Offerings under Rule 701 must still comply with any applicable “blue sky” laws (noticing a trend?!), and in California this typically involves filing a 25102(o) notice with the Department of Business Oversight when crafting an equity incentive plan.

Informed founders can take the first step to proper upfront planning to avoid downstream complications when it comes to issuing securities to other founders, service providers and investors. Additional rules and requirements may apply to your situation and you are strongly encouraged to speak with an experienced attorney as the penalties can be quite harsh. If you have any questions, don’t hesitate to reach out to us at 415-633-6841, or at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Should Your Business Be an LLC or a Corporation?

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This post was originally published on Yahoo Small Business Advisor Entrepreneurs can generally choose from a number of different entities when incorporating their business. Due to the fluid nature of businesses, however, the advantages and disadvantages are not always clear at the time of formation. Limited liability companies (LLCs) and corporations are the two most… Read More

This post was originally published on Yahoo Small Business Advisor

Entrepreneurs can generally choose from a number of different entities when incorporating their business. Due to the fluid nature of businesses, however, the advantages and disadvantages are not always clear at the time of formation.

Limited liability companies (LLCs) and corporations are the two most typically attractive options for small businesses considering incorporation. Unlike sole proprietorships and general partnerships, members of LLCs and shareholders of corporations have limited liability and greater protection for their personal assets. Members and shareholders can limit their liability and protect their personal assets from creditors.

But if both options offer owners liability protection, why do some business owners choose to form an LLC instead of a corporation, and vice versa? Below are some considerations to help you decide what type of entity might be the best fit for your business.

1. Corporate Formalities

Unlike a corporation, an LLC does not have to hold regular meetings and keep corporate minutes, which reduces the paperwork of maintaining your entity.

2. Taxation

The tax default for an LLC is treated as a pass-through entity, meaning the profits or losses from the entity pass through directly to the owners. Owners of an LLC can instead elect for it to be taxed as a C or S corporation so they can access certain tax advantages based the company’s income and expenses. The tax default for a corporation is subject to taxation at both the entity and the owner level. A corporation can also elect to be taxed as an S corporation which, like LLCs, allows for pass-through taxation. However, additional restrictions regarding who can be a shareholder of the corporation exist if you elect to be taxed as an S corporation. For example, S corporations can have no more than 100 shareholders and can have only one class of stock.

3. Debt Inclusion

Early on, a startup or small business will often operate at a loss. Corporation shareholders may not deduct losses beyond their basis in their stock or debt obligations. In contrast, LLC owners can include their proportionate share of the debt from the LLC, so they can deduct a larger share of the losses.

4. Management

An LLC’s members or managers can manage the company. In contrast, a board of directors and its chief executive officer are in charge of managing corporations.

5. Distributions

A corporation must allocate its distributions in proportion to each shareholder’s ownership share. An LLC, on the other hand, does not necessarily have to allocate its profits or losses in proportion to each owner’s membership interest. Instead, the LLC’s operating agreement (which is subject to certain IRS restrictions against negative capital accounts) can determine the distributive share of gains, losses, deductions or credits. Additionally, members of an LLC can transfer and withdraw property into the LLC without the recognition of taxable gain by the LLC or the member with whom the property has been distributed. In the case of corporations, property distributions can result in taxable gain.

6. Investment

Entrepreneurs hoping to achieve venture seed funding typically choose the Delaware C Corporation. Venture capital firms won’t automatically screen out businesses that are not incorporated in Delaware, but they prefer it due to their friendly corporate governance benefits and predictable corporate laws.

Selecting an entity that is appropriate for your business will depend on how you plan to run the business and where you hope to take it. One size does not fit all. Crafting a strategic entity can mean a world of difference as your business begins to take off.

By Alex King & Doug Bend

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How To Sweeten the Deal for Convertible Note Investors

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By Doug Bend and Luthien Niland This article first appeared on Forbes Startups seeking seed investment do what they can to entice investors, especially investors who are deciding whether to invest in your company or elsewhere. One common method for raising seed funding is a convertible note, which is a loan from an investor to a… Read More

By Doug Bend and Luthien Niland

This article first appeared on Forbes

Startups seeking seed investment do what they can to entice investors, especially investors who are deciding whether to invest in your company or elsewhere.

One common method for raising seed funding is a convertible note, which is a loan from an investor to a company that has the upside of converting into equity if the company raises a certain amount of financing within a set amount of time. There are several reasons why the vast majority of seed stage investment rounds use convertible notes, including that it defers the valuation of the startup until a later round of financing and is a relatively inexpensive investment vehicle for infusing cash into a startup without a significant amount of legal time.

Our law group has helped close dozens of seed rounds for startups raising investment capital using convertible notes, and in the process, we’ve noticed that there are a few ways to “sweeten the deal” through convertible-note provisions—things investors may be looking for that could be effective bargaining tools for you.

Prepayment Only With Approval

Some convertible-note documents allow the startup to prepay. While this gives the company flexibility, it may not be attractive to investors who are aiming to hit a home run, rather than just interest on a loan.

An investor’s nightmare is to pick a winner, but the startup prepays the note before it converts and the investor misses out on the company’s upside. To assure a potential investor that this will not happen, you can offer a convertible note that may only be prepaid with the consent of the holders of at least a majority of the outstanding principal amount of the notes.

Favorable Investor Provisions

Early investors may be concerned that a startup will leverage their funding to grow confidence in the company, and then be in a position to offer later investors more favorable investment terms. Reassure investors that their early participation in the company will not put them at a disadvantage, and if the company offers better terms to other investors, they will also benefit from those terms with a provision that will automatically apply all favorable changes to the terms of the convertible note to all of the notes.

Cap On Conversion Price (aka the “Instagram Provision”)

Most convertible notes provide a 20 percent discount if the note converts into equity compared to the price paid by the next round of investors, to reward the risk taken by early stage investors.

However, if the company takes off, even after a 20 percent discount the seed-stage investment might not translate into a significant stake in the company. For example, a $25,000 seed stage investment in Instagram without a conversion cap would have translated into a very small equity stake, because the company was valued so highly at the next round of investment.

A conversion cap helps to align the incentives for the founders and the seed investors to seek as high a valuation as possible in the next round; without a cap, a seed stage investor’s investment will become worthless as the company’s valuation increases. By adding a conversion cap to the convertible note, your startup can tell investors that their investments will convert into a fair equity stake, and your investors will want the company to grow in value as much as possible.

Premium on Investment Upon Sale of the Company

Some convertible notes provide that an investor will be repaid only their investment amount plus accrued interest if the company is sold before the note converts. Similar to prepaying the note before it converts, investors may be wary of providing money to a startup as a loan rather than a potential high return investment.

To sweeten the deal, offer to include a provision that provides that the investors will get their money back with interest, plus a premium, if the company is sold before the note converts. Premiums are generally a multiple of the principal amount of the loan, i.e., 1.5 to 2 times the principal amount.

Hopefully offering one or two of these provisions to potential investors will make the investment more appealing while not disadvantaging your company too much. Every set of convertible note agreements is different, so you should consult with your legal counsel prior to including any of the above provisions.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Top 7 “Gotcha” Provisions For Investors To Watch Out For In Convertible Notes

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Bend Law Group has helped close dozens of seed rounds for startups raising investment capital, the vast majority of which are still completed using convertible notes. Here are the top seven provisions investors should be on the lookout for when negotiating convertible notes with startups. 1.  Prepayment Of The Note Some convertible note documents allow… Read More

Bend Law Group has helped close dozens of seed rounds for startups raising investment capital, the vast majority of which are still completed using convertible notes.

Here are the top seven provisions investors should be on the lookout for when negotiating convertible notes with startups.

1.  Prepayment Of The Note

Some convertible note documents allow the startup to prepay the convertible notes.

An investor nightmare is to pick a winner, but the startup prepays the note before the note converts and the investor misses out on the company’s upside. Instead, the convertible note should provide that it may only be prepaid with the consent of the holders of at least a majority of the outstanding principal amount of notes.

2.  Most Favorable Investor Provision

If the company offers better terms to other investors, you should also benefit from those terms. You can do so by adding in a provision that provides any changes in the terms of the convertible notes that are more favorable to investors shall automatically apply to all of the notes.

3.  Cap On Conversion Price, aka the “Instagram Provision”

Most convertible notes provide a 20% discount if the note converts into equity compared to the price paid by the next round of investors. This conversion discount is intended to reward the risk early stage investors take for supporting the company.

However, if the company really takes off, even after a 20% discount the seed stage investment might not translate into a significant stake in the company. For example, a $25,000 seed stage investment in Instagram without a conversion cap would only have translated into a very small equity stake because the company was valued so highly at the next round of investment.

A conversion cap helps to align the incentives for the founders and the seed investors to seek as high a valuation as possible in the next round. To make sure your seed stage investment still converts into a fair equity stake, the convertible note should include a conversion cap.

4.  Sale Of The Company

Some convertible notes provide that an investor will only be repaid their investment amount plus accrued interest if the company is sold before the note converts.

If you invest in a startup that is purchased before the note converts you should be adequately rewarded.

Instead, you include a provision that provides that the investor will get 1.5 or 2 times a return on the initial investment if the company is sold before the note converts.

5.  Voluntary Conversion

Most convertible notes do not convert by the note’s maturity date. It is important to bake in a provision that provides the investor with the option to still have the note convert into equity at the maturity date at an agreed upon conversion price.

6.  Right to Invest

One incentive to act as a seed investor is to be on the inside of a new company, and hopefully this “insider” status will give you the ability to invest more later if the company takes off. However, these investment rights are not automatically guaranteed, and if a company is hot then there will be plenty of other investors ready to buy during the next round.

Guarantee your right to invest later by adding a Right of First Offer provision into the convertible note, so that you are informed of and given the chance to participate in all equity offerings.

7.  Warranties and Representations

Just as important as the above economic provisions is including strong warranties and representations to kick the tires of the company. You would, for example, certainly want to dig deeper if a company is not willing to include a warranty and representation that there are no threatened or pending actions against the company.

Every set of convertible note agreements is different and so you should consult with your legal counsel prior to making an investment. However, the above list is a good starting point to make sure that the risks of investing in an early stage startup pays off it the startup becomes successful. If you have any questions, give Bend Law Group a call at (415) 633-6841 or email at info@bendlawoffice.com.

By Doug Bend and Luthien Niland.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How to Change Your Company Name

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By Luthien Niland Do you want to change your company’s name? If your company name is outdated, too complicated, or needs to be changed for some other reason, you must change the name with all government and other entities that have your current name on file. Not only is this important for proper name recognition,… Read More

By Luthien Niland

Do you want to change your company’s name? If your company name is outdated, too complicated, or needs to be changed for some other reason, you must change the name with all government and other entities that have your current name on file. Not only is this important for proper name recognition, but legally you cannot conduct business or sign contracts under a name that is not properly registered.

If you simply want your business to go by an additional name, but you are happy keeping the current legal name on record, you can simply register a new DBA with the county. If you want to change the legal name of the company, however (for example, when “Jerry’s Guide to the Worldwide Web” decided it made more sense to be named “Yahoo”), then the checklist below is a good starting point.

1.  Internal Approval

Changing the entity’s name typically requires approval from the decision makers of the organization. This means amending the Articles of Incorporation for a corporation or the Articles of Organization for an LLC. The bylaws or operating agreement of the entity should describe the approval process.

2.  California Secretary of State

Next the name should be changed with the California Secretary of State by filing either a Restated Articles of Incorporation or Restated Articles of Organization. This will legally change the name of the entity if it was formed in California.

Note for Delaware entities: If the entity is a Delaware corporation or LLC that is qualified to do business in California, the name must be changed in Delaware first.

To do this, file a Certificate of Amendment to the Certificate of Incorporation (or Certificate of Formation for LLCs). Once the name change is processed, request a “Certificate in RE: Name Change Amendment” using the Corporate Certificate Cover Memo, and submit this Certificate with a signed Amended Statement by Foreign Corporations to the California Secretary of State.

3. IRS

In many cases changing an entity’s name will not require a new EIN, but check IRS Publication 1635 to be certain.

If a new EIN is not required, the entity name may be changed when filing the tax returns for the business, or you can send a letter to the IRS stating the name of the company has been legally changed that includes: a copy of the endorsed Amendment to the Certificate of Incorporation (or Formation), the company’s FEIN, and a mailing address where the IRS can send a confirmation of receipt. The letter must be signed by an LLC manager or corporate officer.

4. Board of Equalization

If the business sells tangible goods in California, the entity must obtain a seller’s permit. As long as only the entity name is changing, not the entity type, you should file the BOE-345 form. If the entity type also changed, you must obtain a new Seller’s Permit and file a Close of Business form with the BOE.

5. Employment Development Department

You can change the entity name with the EDD by logging into your online account and updating your account with the name change.

6. City and County Registrations

The city business license should be updated with the new business name. Contact the city where you business is located to determine what forms must be filed to update the license.

To change the name of a business that registered a fictitious business name (DBA), a new fictitious business name statement must be filed with the county and published in a local newspaper. Contact the county where the business is located for filing instructions.

7. Miscellaneous Organizations

After you have legally changed the name in the entity’s state of incorporation, don’t forget to also change the name with business service providers (i.e. banks, credit cards, payment processing accounts, etc.) and online business listings (i.e. Yelp, Facebook).

For many companies these are the steps necessary to change your business name, but please contact us at (415) 633-6841 or info@bendlawoffice.com to make sure no additional steps are required as each situation is unique.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How Does Minimum Gain Chargeback Work?

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Nonrecourse Debt What is minimum gain chargeback? Many LLCs finance acquisitions of property with nonrecourse debt. When this occurs, the economic risk to individual members is limited to their cash investment and any portion of the loan for which they may be personally liable. We use the term “economic risk” because if the LLC were… Read More

Nonrecourse Debt

What is minimum gain chargeback? Many LLCs finance acquisitions of property with nonrecourse debt. When this occurs, the economic risk to individual members is limited to their cash investment and any portion of the loan for which they may be personally liable.

We use the term “economic risk” because if the LLC were to walk away from the debt, the nonrecourse nature would leave each member at a loss only to the extent of their cash investment in securing the loan. Therefore, allocating a depreciation deduction to each member lacks economic effect unless it accurately reflects a corresponding economic burden to the member.

Minimum Gain Chargeback

This is where minimum gain comes into the picture. Because an allocation of a nonrecourse deduction lacks economic effect, the regulations will only allow such allocation if the tax payback is accomplished through a “minimum gain chargeback” (Reg. Sec. 1.704-2(f)(1)). A minimum gain chargeback is a provision within the operating agreement requiring the LLC to allocate minimum gain to those members who previously were allocated nonrecourse deductions.

Example

A good way to think of minimum gain is this: any excess of the nonrecourse liability over the adjusted basis of the property that secures the debt results in a minimum gain situation. In other words, an LLC is only in a minimum gain situation if they were to dispose of the property and the debt exceeds the adjusted basis.

For example, assume member A and member B form an LLC to acquire property they plan to fix up and sell. Both contribute $50,000 to the LLC, which they use to secure a $1,000,000 piece of property (down payment of $100,000 and $900,000 as a nonrecourse loan). Let’s also assume no principal payments are due on the loan for 5 years.

In year one the LLC is permitted to take a $50,000 depreciation deduction, which is allocated 50/50 to each member. Do we have a minimum gain situation? No. In year one the LLC would not realize minimum gain because if the property was disposed for full satisfaction of the nonrecourse debt ($900,000) its amount realized would not exceed its adjusted basis ($950,000).

Now in year two the same $50,000 depreciation deduction occurs. Do we have minimum gain? We still do not, as the debt ($900,000) does not exceed the adjusted basis ($900,000).

How about in year three if the LLC takes another $50,000 deduction allocating the deduction 50/50 to each member? Yes! Now the debt ($900,000) exceeds the adjusted basis ($850,000).

In Conclusion…

Minimum gain is a neutralizing provision that permits a member to receive a tax benefit in a year despite the benefit lacking economic effect (i.e., the member has no economic risk if the property goes under due to the loan’s nonrecourse nature). However, to offset the benefit the taxpayer receives, a minimum gain chargeback provision within the operating agreement requires the member to have a tax burden based on the amount of allocation they took below the adjusted basis if the property were to be disposed. In our example above, if the property were sold after year three the chargeback would be $50,000, which is the amount of nonrecourse debt that exceeded the adjusted basis.

As you can see, minimum gain can be tricky. However, for many LLCs the benefits can certainly outweigh the risks. It is important to ensure you talk to a tax professional and an attorney when putting together an operating agreement as typical boilerplate language may not cover your unique situation.

For question or comments about this article, or to talk through your particular situation, please call us at (415) 633-6841 or email us at info@bendlawoffice.com

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Even Business Partners Need a Prenup

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What is a buy-sell agreement, and why is it so important? By Doug Bend  This post first appeared on Nerd Wallet’s Advisor Voices.  Many entrepreneurs decide to launch a small business because of the vision and passion they share with a longtime friend or colleague who becomes their business partner. But as with virtually any… Read More

What is a buy-sell agreement, and why is it so important?

By Doug Bend 

This post first appeared on Nerd Wallet’s Advisor Voices. 

Many entrepreneurs decide to launch a small business because of the vision and passion they share with a longtime friend or colleague who becomes their business partner.

But as with virtually any marriage or relationship, things can change, and you need to be prepared for that possibility – before the honeymoon is over.

A buy-sell agreement is a legal contract between the co-owners of a company that addresses a variety of business-changing events, such as if an owner dies, retires, becomes disabled, or is booted out of the company.

When Things Get Rocky

Just like a prenuptial agreement, a buy-sell agreement is a roadmap that can be used if one or more partner decides to change course. Often, the agreement is drafted at a time when all parties are on friendly terms and in sync on the business’s direction. This lessens the chance of a dispute if things turn sour or tragedy strikes.

When putting together a buy-sell agreement, the parties must decide which events will fall within the scope of the agreement and how each event will be handled.

Two of the more common triggering events include the death or permanent disability of a partner. Even a successful business may lack the cash necessary to buy out an owner’s interest after an unexpected death or disability.

In an effort to plan ahead, owners will often take out life and disability insurance policies on business partners. This way, if one becomes disabled or dies, the remaining owner or owners will have the necessary funds to buy out the partner’s interest.

An effective buy-sell agreement outlines how this will take place. In the absence of a buy-sell pact, a deceased partner’s ownership interest would pass to his or her estate, and the remaining owner could face a long and complicated legal process.

Other important provisions in a buy-sell agreement include how each owner’s interest will be valued and what procedures will be in place if one owner decides to sell voluntarily.

What Needs To Be Spelled Out in the Buy-Sell Agreement

An ownership interest in an LLC or a corporation is considered personal property, which means it can be transferred freely as long as there are no provisions to the contrary in the company’s charter documents or imposed by law.

Having restrictions that force the departing owner to first offer his or her interest to the remaining owners provides a mechanism to ensure the ownership of the company stays in the hands of a select few.

For the agreement to achieve its basic objectives, the percentage of the company that each person owns—and the purchase price of each partner’s share—should be clear and unambiguous.

An effective valuation procedure should provide a means for determining the purchase price of a departing owner, whether the value is defined as an agreed-upon amount by the owners, a formula or through a method using a third party.

There are some factors to consider when drafting a buy-sell agreement. Here are a few key points for your company’s attorney, accountant, and business partners to consider.

  • What are the potential sources of funding for purchasing an ownership interest?
  • Which partners will be included in the buy-sell agreement?
  • Will installment payments be considered for the purchase of an ownership stake?
  • How will the valuation process for each ownership stake be determined?

The final terms can vary depending on a number of factors, including the size and financial condition of the company, the health of the owners and the individual preferences of the partners.

Taking the time to plan now can help you avoid major headaches and disputes down the road. For more information on how you can plan ahead for your business, please contact us at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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