New Businesses May Need “Pre-Nup” Agreements Among Principal Owners

Houston Litigation Attorneys Develop “Pre-nups” to Protect Business Assets

Business owners, particularly those involved in fledgling enterprises, often joke that they spend more time with each other than they do with their respective spouses. The marriage reference is actually a good one. Just as many marriages start off quite well, but later fail for a number of reasons, so business relationships can sour without early and clear lines of responsibility and careful communication. Many are turning to business “pre-nup” agreements that set forth each person’s expectations. Business and legal experts agree that a good business “pre-nup” should cover at least the following issues.

Who’s the Boss?

All too often, owners will go into an arrangement with so much confidence in their own abilities that they forget that others should have a say as well. A business pre-nup should clearly state which owner is to be in charge of day-to-day operations. If management is to be shared, the owners should recognize that it will slow down the decision-making process. How much can an owner spend without the consent of the others? These issues need to be nailed down.

How Will One Owner Be Bought Out by the Others?

As time moves along, some business owners, particularly those who might not be involved in day-to-day activities, may seek to move on. A good pre-nup will set out the procedure to be followed. Owners should recognize that if this critical issue isn’t handled, the other owners have the right to dispose of their interests in any way they see fit. You might find out one day that you have a new and unfriendly “partner.”

Salary and Profit Distribution Issues

Particularly where there are both active and inactive owners, management salaries and profit distribution can get sticky. Have you agreed on a reasonable salary structure? Have you agreed to distribute profits or will they be plowed back into the company. What happens if there are no profits? Early attention to detail in these important financial areas can prevent  explosions later.

Other Succession Issues

Just as a married couple should consider drafting appropriate wills and trusts to handle the disposition of property at death, so business partners need to account for this contingency as well. Without appropriate terms, you may end up with a surviving spouse as a new partner.

Expansion Issues

Will the business likely expand beyond its initial footprint? If the owners contemplate expansion, they should also contemplate how that expansion will be financed. Are loans a possibility? Will new owner capital be required? Will new partners be necessary to fund the expansion? Owners often forget these sorts of details, thinking “we get along so well, it won’t be a problem.” You get along today – not necessarily tomorrow.

Business Pre-Nups Should Be Customized

Some business owners have the attitude that all problems can be solved with a download of a form document from the Internet. While the download may cover some of the necessary issues, it certainly isn’t created for the specific needs, goals, and challenges of your particular business operation. Most experts agree that time (and money) spent early discussing important ownership issues and expectations – and reducing the agreement to writing – can be one of the most important things done in the early stages of a business.

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    Romano & Sumner, PLLC

    Romano & Sumner, PLLC