CRAIN’S CLEVELAND | Forming a business: Critical questions for the entrepreneur before forming a partnership or engaging an attorney

Forming a business: Critical questions for the entrepreneur before forming a partnership or engaging an attorney

By MICHAEL A. ELLIS, BUCKINGHAM, DOOLITTLE & BURROUGHS LLC

The ability to collaborate with other individuals to develop an idea is critical to the success of thousands of products, services and even artistic endeavors. However, not all relationships start like a fairy tale or end “happily ever after.” Before starting your venture, take some time with your partner or partners to answer some basic questions regarding structure, decision-making and dispute resolution. Spending time on these issues before commencing your project will save all sides important time and money should problems, as they most certainly may, develop later on.

GETTING STARTED — DETERMINING ROLES

The first questions to be asked, which require an answer, are “who’s in charge” and “what is the scope of their authority.” Even if one individual is to own the majority of the equity of the enterprise, will he or she be able to make all decisions, regardless of the wishes of the other owners?

If yes, do the minority owners have options to sell his or her stock to the majority owner? If so, at what price and how is such price determined?

While many decisions, including day to day operations, may be left to the discretion of the majority owner or a manager, often, “fundamental” decisions require the approval of a super-majority of the owners. Alternatively, an individual who funds the majority of the enterprise, even if less than the majority owner, may have “veto” rights over certain decisions.

These fundamental decisions may include, as examples, the following:

Sale of the company or its assets

Sale of additional equity (including convertible debt) in the enterprise or any bank borrowing

Entering into a significant contract of greater than a certain amount

Entering into a related party transaction or change the salary or benefits of one or more owner

Allowing one of the owners to transfer his or her equity to a third party

PLANNING FOR DEPARTURES

Another critical issue that should be discussed among the partners is how to account for one or more of the partners electing to leave the enterprise and work on a different venture, perhaps even in a different city. It is not unusual for a partner to lose enthusiasm for a project, particularly one that has yet to generate any revenue and therefore any or significant income for the individual.

The full article is published in May 14, 2018 Crain’s Cleveland Business.

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