Business Agreements among Owners and Key Employee
Operating Agreements. Each partnership and limited liability company electing to be treated as a partnership for federal income tax purposes needs an operating agreement to establish the rules of the road for the company, including such issues as how is the entity governed, how are owners compensated and how is excess cash distributed. Operating Agreements allow tremendous flexibility in business agreements.
Corporate Articles and By Laws. Corporations and entities electing to be treated as a corporation are governed by their articles of organization and by laws. Similar to Operating agreements above, this is where the rules of the road and the governance of the entity are located. Many times because of advantageous tax or legal provisions, clients find that the corporate entity is their best vehicle. It is important to consider the downsides to operating in the corporate form for non- public clients.
Employment Agreements and Draws. Employment agreements defines the terms and conditions under which everyone in the Company, from the Company President to the most recent hire, operates, including hiring, advancement, education, incentive payments, employee benefits and time away, to severance and post-employment activities such as nondisclosure and confidentiality as well as non competes.
Incentivizing Key Employees and Profits Interests.
Where a non-owner individual will make a key impact in the organization, limited liability companies can provide significant upside benefits of compensatory nature and control the timing of these benefits.
Example: Two experienced leasing agents and an owner of a largely vacant shopping mall combined forces to form a new LLC. In return for 48% profits interest in the net profits generated by the now fully leased shopping mall, the original purchaser of the shopping mall was able to ensure a healthy profit without the management hassle of operating the shopping mall.
- Buy & Sell Agreements. There comes a time in every business, where one or more owners will exit the business. This may come from death, illness, disability, retirement, divorce, bankruptcy, incarceration, moving, change in interests or by disagreement. The agreements should reflect a mechanism to permit an exit by an owner or owners, i.e., a formula to determine the value of the business, and a funding formula that the business can afford.