Company Formation Mistakes

images-765176Company formation can be a really easy task and the Internet has made it even easier.  You can form a company in minutes, but should you? If you are the sole owner, then absolutely.  However, partnerships should be entered into with much more calculation.

I currently have a client, Bill, who is wanting to fire his partner, Joe.  They formed a subchapter S corporation and share equally in the company.  Their business has just started to gain traction and the Joe is not holding up his end of the bargain.  Bill wants to try to buy Joe out, but he’s not sure that Joe will sell his part of the business, since it is starting to take off.

In my discussion with Bill, we talked about his options with getting majority voting power.  He is also considering taking on a third partner to distribute the votes so that they can make the proper decisions without a stalemate scenario.  However, Bill ultimately wants Joe out of the company.  My next question to Bill was asking him if he had a corporate charter and bylaws.  Bill looked at me with questions all over his face and let out a, “No…What’s that?”

Bill’s situation became even stickier since he did not have a governing document for how the corporation and partnership will operate.  If Joe does not sell his share, then Bill has no legal right to fire him.  Joe can move into a silent partner status at his discretion, but he will still be entitled to half of the profits.  Check out this article on “How to Fire a Business Partner Who Owns 51% of the Company

When you are looking to form a company with a partner you obviously trust that partner at that point in time and typically do not feel a need for such documentation.  This is a normal feeling, but good business sense dictates that you plan for the future and mitigate potential risks.  An attorney skilled in company formation is highly recommended to draw up the partnership agreement.

Start-up businesses are usually cash poor and company formation can cost more than $1000.  If you are unable to afford this in the beginning, then you should at least find a template that you can work off of and research common partnership agreement inclusions.  While the DIY method will leave you with holes in your legal defense, it is better than not having anything.

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“Stop Doing the Mundane, and Start Getting Weird”

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