A new member, shareholder or partner for your business might make sense. Maybe the new person adds great connections, special know-how, or deeper pockets to help capitalize the business for growth. But what exactly does it mean for you to add someone new to your business?
First, let us look at the differences between a member, shareholder and partner. These are the labels given to the owners of different types of businesses. A member is the owner of a limited liability company. A shareholder is the owner of a corporation. And a partner is the owner of a partnership. An owner of any of these types of entities is someone who owns an equity interest in the given entity. In other words, an owner, because he or she owns equity, shares in the profits and losses of the business. A member or shareholder each has the added benefit of personal insulation from the liabilities of the business. A partner may or may not be insulated personally from the liabilities of the business.
To add a new owner to your business is a major step. Once you do this, you are giving up some control over the business and you will share profits (and losses) with the new owner. The co-owner, especially if a minority interest owner, has certain protections and rights under corporate law because of the fiduciary duties between co-owners. Finally, a co-owner cannot be “fired” from the business even if the new owner commits egregious acts. In that event, such owner might only be excluded from management and control of the business but may still have an economic interest in the business.
The basic step to add a new owner is for the parties to agree on how the new owner will acquire his or her equity interest. The new owner can acquire a portion of the equity of the other owners. Or, the new owner can acquire a new equity interest issued by the LLC, corporation or partnership itself. This is where many business owners run into trouble. They add someone as a “partner” with such person being only a consultant (i.e. 1099 contractor) in the business owner’s mind. But the new “partner” might believe that he or she is an equity owner. For this reason, it is important for the business owner to only add new owners pursuant to a written agreement, such as an investment agreement or purchase and sale agreement, between the parties that sets forth all the terms and conditions of the transaction and intended relationship.
At the time the new owner acquires his or her equity interest it is highly advisable that the owners enter into certain additional agreements (e.g. buy/sell agreement) to regulate when, how and to whom any given owner’s interest can be transferred (or should be transferred). Finally, one must be aware that the mere offer or sale of an ownership interest in a business will trigger certain qualification, filing or reporting requirements under the securities laws of a given state and under federal law.
This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction. This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation. If you need legal advice, consult a qualified attorney. For more information please visit my website at http://www.palacioslawoffice.com.