What are some common disputes in closely held companies?
The owners of closely held companies often get along well, at least while the money is flowing. When trouble arises, however, it frequently stems from one of these situations:
1. A lack of a written agreement.
During the infancy stages of many new businesses, the owners often begin “on a handshake.” Everybody trusts everybody at the beginning, and nobody sees the need to reduce anything to writing or hire a lawyer to draft a shareholder, operating, or partnership agreement.
These owners do a great job of predicting the success of their new product, idea, or business plan, but they do a lousy job of predicting the problems that success can bring. Years later, these owners often find themselves in disputes, usually over money or control of the business. Often no written agreement exists to give direction to the owners, and each owner may have a different memory of the past.
A written agreement between the owners often reduces ambiguous rights and duties, more clearly defines the owners’ ownership stake, and guides the management and direction of the company.
2. Owners wearing too many hats.
Another common source of conflict between the owners of a closely held company is the owners wearing too many hats, i.e., playing too many roles. For example, the owners of closely held companies can be required to play different roles including majority owner, minority owner, president, manager, co-manager, managing-member, operator, treasurer, board member, supervisor, investor, and employee. These are each different roles with different (and sometimes conflicting) duties and responsibilities.
What happens, for example, when the 51% owner, who is also the manager of the business, decides to fire the 49% owner, who is also an employee? Does the 49% owner have a right to a job at the company? Can the 51% owner set everybody’s salary, including his or her own, regardless of whether the 49% owner agrees or disagrees?
This again re-emphasizes point one, which is the importance of a written agreement. With many roles, the many varying roles that owners play in a closely held company, defining those roles and expectations is critical to reducing disputes.
Please Note: Rabin Kammerer Johnson provides these FAQ’s for informational purposes only, and you should not interpret this information as legal advice. If you want advice as to how the law might apply to the specific facts and circumstances of your case, please contact one of our attorneys.
