GOVERNING THE ENTITY

     Once you have decided to form a business entity, the next step is to carefully consider how your business will be governed. Stationary store or boilerplate documents can provide standard rules for governing your business entity, but often these are the default provisions copied straight from state business law statutes. The default rules may or may not sufficiently or accurately reflect the understandings between you, your co-founders, investors and/or employees. Fortunately, the business statutes also provide that you can vary and/or supplant some of the default rules by your own agreement. Consequently, it is worthwhile to carefully consider this issue and take advantage of the ability to tailor your governing documents to fit your specific circumstances and address any specific issues and/or concerns.

     Each type of business entity has documents that provide for its operation and governance: the corporation has bylaws, the partnership has a partnership agreement and the limited liability company has an operating agreement. Essentially, these documents are contracts between the founders, investors and/or employees and their terms can be drafted to address specific agreements and understandings between these parties. As a contract, the terms can be later amended and modified. However, amendments usually require the consent of most if not all the parties to provide stability for the organization so if an issue or conflict arises you may not be able to amend the agreement. Consequently, instead of hoping that no new issues or circumstances arise, you and your business colleagues are better served by taking the time when initially drafting your agreement to flush out and address potential issues. For example, some common issues that arise are:

     Should decision making authority be delegated, and if so to whom and what are the parameters of that authority?

     What happens to an owner’s interest in the business if he or she wants to sell it or if the owner dies?

     Who will decide and what will the process be for allowing additional parties to obtain an interest in the business?

     Nevertheless, because you cannot anticipate all future circumstances, you should also consider and include provisions in your agreement that provide mechanisms for problem solving and dispute resolution. If you work to formulate these provisions in your own language, the agreement will provide a clear road map everyone involved in the business can easily follow as new issues arise.

     Regardless of the type of business entity you decide to form, you will need a written agreement governing its administration and operation. Though it might appear that the default rules under state statute are sufficient for your business, you may avoid later problems and complications by carefully considering whether the default rules sufficiently and accurately reflect the understandings between you, your co-founders, investors and/or employees.

     At Aoki & Sakamoto LLP, we are experienced in working with clients starting their own businesses and helping them tailor the governing documents to fit their specific circumstances and address any specific issues and/or concerns. If you are considering starting your own business and would like to discuss agreements governing your business or any other start up issues, please give us a call.     

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