Buy-Sell and Control Agreements

Plan Ahead

Certainly, selecting the type of legal structure is important for any new small business venture. Although Limited Liability Companies or LLCs are increasingly favored, the longer used "C Corporation" and "Subchapter S Corporation" all remain popular. Since there is no structure that is superior for every business, because of the variation in the type of business, its assets, liabilities, income and owners, competent legal and accounting professionals should be contacted to make specific recommendations.

But simply deciding upon and creating the legal structure is only one of several steps which should be considered. In addition, Many Limited Liability Companies and Small Business Corporations include both "Control Agreements" and "Buy-Sell Agreements" which determine the powers, duties and rights between members and shareholders. Control Agreements can include voting rights, management responsibilities, compensation, the conduct of member meetings, distribution of profits and assets upon liquidation of the business and other items of governance.

Buy-Sell Agreements, either separately or included in Control Agreements, deal with the withdrawal and payment of a member's interest in the event of the transfer of that interest by voluntary or involuntary sale, death, disability, retirement or expulsion. Each of these Agreements requires detailed consideration and negotiation by all the organization's members. The greater the planning, negotiation and deliberation in preparing such Agreements, the easier these situations are managed when and if they arise. Such situations, particularly withdrawal or expulsion of a member and the payment of his or her interest, can be much easier if the procedure is agreed upon in advance. There are many variations in these documents, which can only be thoroughly reviewed by competent legal counsel not only for the business entity itself, but separate counsel for each of the members as well. It is true that such documentation may take time and be expensive, but it will likely prevent misunderstandings and severe and expensive legal disputes in the future.

There are many instances where Buy-Sell Agreements, in particular, prevent nasty surprises which occur more often than businessmen realize. And it's not simply dealing with death, disability, retirement or voluntary sale. One example is when a member is involved in a divorce, now known as dissolution of marriage in Minnesota. There are several difficulties which seem to recur in a closely held enterprise when one of its members is involved in such a proceeding, one of which can be dealt with by a Buy-Sell Agreement.

First, there is almost always the emotional toll marriage dissolution takes on that member and the impact it has on his or her work. The more crucial he or she is to the organization, the greater the difficulty to the enterprise.

Second, during the marriage dissolution proceeding itself, there are economic issues that both the fellow member and the member's spouse, and their attorneys will have to inquire into. These include valuation of the organization and of the member's interest in it and whether he or she has been forthright in describing these economic matters including income earned. Inevitably this seems to require, at the least, deposition testimony, under oath, of one or more of the other members and thorough inquiries into the organization's assets, liabilities and value as a business operation. In a Minnesota marriage dissolution, the value of at least a portion of a spouse's interest in a business organization is typically "marital property" that both husband and wife have an ownership interest in.

Third, depending upon the economic circumstances of the parties involved in a marriage dissolution, the fellow owner's spouse may be awarded a portion of his or her member's interest in the organization and will thereafter have to be considered in many, if not all, organization decisions. The likelihood of this often unanticipated and unwanted circumstance increases when almost all the assets of the member in the marriage dissolution proceeding are "tied up" in the business. There are few, if any members or shareholders of any small business who want to deal with a fellow owner's ex-spouse in the management and operation of the enterprise. A Buy-Sell Agreement can effectively avoid this often intolerable situation in a Minnesota Marriage Dissolution.

The failure rate of marriages in Minnesota is a strong reason, by itself, to require all members or stockholders of a small business to enter into a Buy-Sell Agreement to avoid the judicial transfer of a member's interest to an ex-spouse. Preferably when the organization is created or shortly thereafter, legal counsel familiar with Buy-Sell Agreements should be consulted to prevent this possible difficulty. When a member's marriage dissolution appears a certainty, it's most likely too late for such an agreement.

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