When starting a business, whether a limited liability company (“LLC”) or a corporation, one of the most important documents are those of corporate governance. These documents are contracts made amongst the owners and with respect to their business. These documents guide the owners as they start and grow a business, allowing both flexibility and control. For example, business owners need flexibility in purchasing, but owners need to ensure one business owner isn’t spending $5,000 on equipment while the other business owner is making a debt payment of $2500, but the business only has $6000 in their checking account.
These provisions are typically within an operating agreement (for an LLC) or the bylaws (for a corporation). Some of the most important provisions in corporate governance concern voting. What must the owners vote on? Typically, these include expenses above a certain amount, entering in contracts, admission of new members, hiring employees and other matters that have significant impact on the business. On the other hand, the owners should not have to vote if printer paper is needed (unless that is their business and a printer paper order may run into the thousands of dollars).
Additional concerns arise when there is an even number of business owners, since deadlock may occur. If there are two owners, what happens when one votes yes and the other votes no? This is where deadlock provisions come into play. Deadlock provisions provide both protection and flexibility, but also ensure that the business moves forward and is not stuck in place due a deadlock. Imagine a lock: deadlock locks it, but the provisions allow a key to be inserted into the lock to unlock the owners and allow the business to move forward.
By the nature of the business or by the relationship of the owners, some businesses want extensive deadlock provisions. A sample might look like this:
- Deadlock occurs
- 30 days of good faith discussion
- Still at deadlock; owners enter into 60 days of mediation
- If owners still are at deadlock, they enter binding arbitration where the final decisions is that or the arbitor;
It is more complicated than that, but this series allows for many instances to break the deadlock. On the other hand, a recent client of ours decided upon these deadlock provisions:
- Members vote and are deadlocked
- A coinflip breaks the deadlock
While very simple, this type of arrangement is what the business owners wanted. They are in the startup phase, and simply cannot be slowed down by a long series of deadlock provisions. Having to go thru a lengthy series of provisions would kill their business.
As a business grows, the deadlock provisions should be reviewed periodically. At some point, a coin flip deadlock breaker simply won’t make sense. More deliberate provisions should be introduced. These provisions, though, need not be as exhaustive as the first example. Perhaps after deadlock, they enter binding arbitration. A faster method to reach a decision, but more complex than a simple coin flip.
These voting provisions are critical, but as the coin flip examples demonstrates, need not be complex. To discuss voting provisions or any other aspect of your business, please contact Benjamin Long of Schmidt & Long.