Business is like a marriage
- In the beginning everything is rosy and the business will be successful and the co-ownership will last forever.
- More of your waking hours are spent in the business than anywhere else.
- Problems occur:
- Between co-owners
- With the operation of the business
- What’s the issue
- Termination of employment does not terminate ownership
- The ownership interest is property of the owner- one owner cannot simply take from another.
- It’s going to cost money
- To buy the interests of the departing owner
- To negotiate
- To Exercise legal rights
- The hard way- Statutory provisions
- Corporations
- The remedy is actually court ordered dissolution of the company
- One or more of the following must be present[1]:
- Deadlock of Directors and shareholders injurious to the conduct of the business (business paralysis)
- Directors or those in control acting in a way which is:
- Illegal
- Oppressive; OR
- Fraudulent
- Assets being wasted or Misapplied[2]
- Dissolution presents its own set of problems:
- In a dissolution property remaining after payments to creditors (including taxes) are to be distributed among shareholders pro-rata[3]
- Many assets may not be divisible:
- Name, phone number website
- Assets may be had to value
- Intangibles like relationships
- Limited Liability Companies
- The remedy may be dissolution of the company BUT for an LLC a judge may order a remedy OTHER THAN dissolution[4]
- One or more of the following must be present[5]:
- It is not reasonably practicable to carry on the business
- The Managers/members have acted in a way which is:
- Illegal
- Oppressive; OR
- Fraudulent
- Dissolution of an LLC presents problems similar to those of a corporation[6]
- Corporations
- Easy(er) Way- Buy/Sell Agreement
- Like a Pre-nuptial Agreement
- Avoids dissolution and problems with distribution of the assets of the business to the owners
- Key Benefits
- Flexible
- Terms can be changeable at any time and from time to time by agreement
- Often purchase price is based on appraisal or a stipulated formula
- Payment amounts and terms can be tailored to meet the triggering event (Example different terms if co-owner simply quits than if they are fired)
- Can be used to eliminate deadlock: one simply buys out the other.
- Determined at a time when parties are not angry/under stress
- Objectively “reasonable” since they are established by agreement-YOU NEVER KNOW IF YOU WILL BE A BUYER OR A SELLER so you better do the right thing.
- Flexible
- Drawbacks
- YOU ACTUALLY HAVE TO DO IT!!
- They can still be difficult and expensive to enforce
- If ownership is not 50/50 they could work to the disadvantage of the minority owner
- Recommended Formula for provisions on buyouts not caused by death, disability or termination of employment- Russian Roulette (one offers a price for the shares of the other and the offeree can buy the offeror’s shares at that price).
Contact the Kreamer Law Firm, P.C. for assistance with a “business divorce”, a buy/sell agreement, or any other legal matter regarding your business at 515-727-0900 or info@Kreamerlaw.com
[1] Iowa Code Section 490.1430(1)
[2] Also failing to elect successor directors
[3] Iowa Code 490.1405 (generally) and 490.1405(d) (particularly)
[4] Iowa Code 489.701(2)
[5] Iowa Code 489.701(1). NOTE: this section also sates additional grounds for judicial intervention.
[6] Iowa Code 489.702(2)