Tips For Starting A New Business – The Right Way

When starting a new business with a business partner, many sophisticated entrepreneurs

overlook the importance of ensuring that they have well-drafted agreements in place to govern

their business relationships with their clients, vendors, and (perhaps most importantly) their

business partners. In fact, one of the most common mistakes I see new business-owners make is

that they often focus exclusively on the future financial success of their business while failing to

ensure that they have a comprehensive written agreement with their business partner that

addresses common (and some uncommon) eventualities.

Whether or not your new business is a corporation or a limited liability company (an

“LLC”), you should be aware that New York statutory law only provides its owners (they are

called “shareholders” of a corporation or “members” of an LLC) limited rights to act - or stop

others from acting - on behalf of the business unless they have a written “Shareholders’

Agreement” for shareholders of a corporation or “Operating Agreement” for the LLC’s

members. These types of agreements are especially important for minority owners (owners that

have less than a 50% ownership interest in the company) because they can be outvoted on

virtually any business decision by the majority owners.

Operating or Shareholders’ agreements can delineate whether an individual owner has the

unilateral right to, write checks over $5,000, hire or fire key employees, or make major business

decisions. Likewise, these agreements can help guide the business’s owners when one of the

owners dies or becomes incapacitated, wants to sell his or her ownership interest, or wants to

close, or “wind-up,” the business. Of course, these are just a few examples of the many things

these agreements typically cover.

Importantly, without such agreements, business owners can be left at the mercy of the

limited rights and protections of statutory law. This is particularly true in the case of LLCs,

because New York law can be especially unforgiving to minority members who never insisted on

putting a well-drafted “Operating Agreement” in place. Indeed, recently I litigated an

acrimonious business dispute between members of an LLC when one member, my client, was

almost completely frozen out of the company because of a poorly drafted operating agreement

the members had downloaded from the internet (fortunately, our firm was eventually able to

force the company to give him a substantial buy-out).

So, for all of you business-owners and entrepreneurs, the upshot is this: Without a

comprehensive agreement to govern the relationship between you and your business partner, you

are putting yourself at substantial risk. If you haven’t done so already, take the time to review

the agreements that you have in place, if any, and if you have any concern that it is not custom-

tailored to cover all of your foreseen (and potentially unforeseen) needs, you should contact a

competent and affordable attorney to review them without delay.

- Matthew Walters is a partner with the firm Walters & Walters, a law firm that specializes in

business contracts, transactional work, and civil litigation. He is admitted to practice in the State

and Federal Courts (including appellate courts) situated in New York and New Jersey. You can

contact him at 212-227-1666 or mjw@walters-legal.com.

Elan