In my practice, which covers both transactional and litigation matters, I frequently talk to clients who have started a new business entity, but neglected to create what I will call “internal” corporate documents (as opposed to the “external” documents filed with the Secretary of State’s office) – agreements laying out the rights, duties and responsibilities with respect to their ownership and operation of the entity. Often, this oversight is due to a desire to avoid what seems to be an unnecessary expense, especially for a start-up enterprise, or a conviction that business partners will always get along and agree on everything. In the absence of such agreements, Florida law provides certain default provisions which will govern. These default provisions often do not, however, reflect the economic reality of many business deals, which makes easily avoidable conflicts between business partners difficult or even impossible to solve without litigation. Unfortunately, by the time I talk to them, the clients are usually facing far greater expense than what is involved in drafting an “internal” corporate document due to pending or threatened litigation from a disgruntled business partner with whom they have had a serious falling-out.
For instance, if the owners (“members”) of a limited liability company (LLC) do not enter into an operating agreement which provides for, among other things, voting power and management of the LLC, the default provisions of Florida law say that management of and voting by the owners of the LLC is in accordance with ownership interests and that all decisions must be by a majority vote. This creates the very real and all-too-common situation of a deadlock. Usually, this leads to accusations of bad faith and, often, to litigation. The cost associated with negotiating and preparing an operating agreement, in this case, pales in comparison with the cost of initiating or defending such a lawsuit.
There are many other critical provisions frequently included in shareholder (for a corporation), operating (for an LLC), and partnership (for a limited partnership) agreements, such as puts and calls, rights of first refusal, restrictions on transfer of ownership interests, declaration of distributions or dividends and the requirement of additional capital contributions, and retirement and purchase on death requirements. Additionally, there are other important “internal” corporate documents which may be appropriate depending on the situation. If you would like to discuss “internal” corporate documents in further detail, please contact our office.