Two friends start a bike shop. After forming a corporation to protect their personal assets as shareholders, each is allotted a fifty percent interest in the company. After a few years of struggling, the business finds its footing and begins to enjoy an extended period of profitability. However, an acrimonious situation develops and the one time friends begin to disagree on the direction of their

company. Deadlocked at fifty-fifty ownership, the once profitable company grinds to a halt and eventually goes out of business. Could this unfortunate result been avoided?

The short answer is “yes”. In any corporation or limited liability company with multiple owners, the execution of a shareholder’s agreement (corporation) or an operating agreement (limited liability company) can pre-empt issues that may later arise in the life of the business. These agreements delineate how profits and losses are allocated to the owners of the company, who is authorized to make decisions on behalf of the company and how officers, directors and managing members are appointed or elected. In addition, these documents can state what is to occur in the event of deadlock of the owners; what happens in the event of the death of an owner; what is to occur if an owner leaves the company; and what happens if an owner wants to sell his or her interest in the company.

Taking the time to specifically memorialize in writing the rights and obligations of the company owners as well as plan for certain eventualities can reduce the possibility of adversarial scenarios that can reduce the efficiency of the business and insure that all owners clearly understand what they are entitled to and must do with regard to their business.