As we start the New Year, it is time for businesses to file their Annual Registrations with the Secretary of State to maintain their status. With the filing of your business Annual Registration, it is also a good time to review your business By-Laws or Operating Agreement to insure that the documents adequately articulate your business plan. All too often our business attorneys see businesses that have ineffective By-Laws or Operating Agreements or documents that do not reflect the intent of the owners of the business. Some business owners try to save money on the front end by not having an attorney review and draft their By-Laws or Operating Agreement. The problem with this approach is that often an ineffective operative document leads to litigation which costs multiples of what an attorney would charge to draft an effective By-Laws or Operating Agreement.
Think Longterm
There appears to be two things many business owners, especially businesses with multiple owners, fail to contemplate when creating their businesses and the business operative documents:
- a disagreement between the owners
- how are we going to close the business down some day
The problem with not contemplating these issues at the inception of the business is that the business owners tend to leave out critical terms in the business operative documents to address these issues. What happens if the owners disagree on the business budget or marketing plan? What happens if one business owner wants to actively manage the business while the other owner wants to be a passive investor? What business decisions can be made by a majority vote of the owners and what decisions need the unanimous consent of the owners? What happens when you do not get unanimous consent or there is a tie in voting? When it is time to close the business, which owners get the assets? What if one owner contributed all of the assets but the other owner did all of the work? If these questions are not addressed in the business operative documents, in some instances the only thing that the Courts are allowed to do under the Georgia Business Corporation is dissolve the company, liquidate the company’s assets, and distribute the company’s assets to the owners.
Strategically Review Your By-Laws for Smooth Business Operations
Because the owners almost always want to avoid such a dissolution, there are a few critical terms that should be contained in your business By-Laws or Operating Agreements. These terms include:
- a breakdown of the ownership percentage of each owner or member
- the rights and responsibilities of the owners or members
- a detailed plan showing how losses and profits will be distributed
- the voting rights of the owners or members
- a management plan for the business and designation of officers or managers for the business
- rules for calling and conducting meetings as well as voting
- buyout or buy-sell rules that govern when an owner or member desires to sell their interest, or in the event of an owner or member’s death or disability
- finally, what happens if the owners decide to wind up or dissolve the business should be specifically outlined
This dissolution provision should not only include how assets are liquidated and distributed but what happens to any existing contracts or patents and copyrights held by the business as well.
Starting a business with the end in mind will help you better understand how to draft your business plan and the business operative documents. If you are interested in starting a business or have a business and need to determine whether your business operative documents are effective, please contact our office for a consultation with a business lawyer.