THINGS TO LOOK OUT FOR WHEN DEALING WITH INVESTORS IN BUSINESS ENTITIES
As proprietors of private corporations, founders often accidentally create contention among current and would-be owners. The legal professionals at Anthony Law Group are familiar with the disputes that arise within partnerships, organizations or LLCs due to misunderstandings over an individual’s share in the company because of their involvement during its formation and early success.
A common situation occurs when friends or family offer their services in helping to build a new business from the ground up, expecting payment for doing so. This is usually delayed until they not only raise the issue but also seek to negotiate its terms and get an ownership interest in exchange for their work contributions.
When a third-party financier supplies the necessary capital to a privately owned business, the relationship between them and the company can become complicated. Once they close the financing deal, there needs to be more clarity around their role in the organization moving forward. When a company needs to secure financing urgently, it may delay the needed discussion between financiers and current owners regarding their respective roles in the future of the business. Financiers may desire an active part in running the business, be unaware of the industry or need somebody to look after their investment. In either case, they must have some involvement with what transpires at the company going forward. Without accurate communication, you may be surprised to find an “accidental” partner, shareholder or member of your company that had not been planned for. In either situation, miscommunication (or lack of communication) could lead to this unexpected outcome.
When a demand for shares arises and the issue of ownership is contested, it is important to look at the documentation of what transpired previously. Companies may want to claim that a financier, promoter or employee has no equity rights in their stock; however, evidence such as corporate records and social media posts might demonstrate otherwise. This makes it essential to carefully review all advertising literature, websites, and other digital material revolving around the company’s operations before making any decisions. The company and its other shareholders may disagree regarding whether the promoter or employee has any ownership rights, while this individual believes they are owed a cut of profits thanks to their performance or based on representations made by the owners. It could end up being an issue that has to be decided in court – which can be an expensive process.
Many people mistakenly think that if a company does not give out stocks, membership certificates or have signed operating agreements, those who wish to become shareholders, partners or members of the corporation/LLC possess no rights. In actuality, this is far from the truth. Several legal principles have emerged to safeguard individuals who were promised a stake in a partnership, company or LLC, and who relied on these assurances or representations even if no stock certificate or membership certificate was ever formally issued.
When an amicable resolution cannot be worked out , litigation regarding the legal rights to a particular business can become necessary. Remember that in litigation, the decision on who is right is left up for judgement by either a judge or jury. No matter how quickly you may be moving to launch your new business, it is absolutely essential that all relationships between promoters, employees and the company are documented adequately in order to avoid a potential legal dispute down the road. Recording the agreement between your business and third-party financiers is equally, if not more, important than any other step taken in securing the capital. If they do not receive all their expected compensation – including ownership rights – financiers possess the right to recall their investments, leaving you and your company without enough funds to maintain operations. Avoiding the “accidental” partner, shareholder or member is paramount and necessitates thorough documentation. To avoid this, you should partner with an experienced business attorney who can prepare all of the necessary legal documents to protect you so you can sleep soundly, knowing that your business interests are safeguarded from potential lawsuits.