Starting a Business? Shutting one down? Trouble with your business partners? Need to know your rights? Here is a quick guide to some of the most frequent issues troubling shareholders, partners, and owners of Texas businesses.
This is a complex decision which should be discussed with a competent business lawyer and tax advisor. As an overview, look at the Guide to Choosing a Business Structure on the site. The primary drivers for choosing among the different kinds of business structures are tax implications and limitations on personal liability of the owners, and secondarily cost and administrative hassle. For the vast majority of small business owners, there is no reason to choose any thing other than a sole proprietorship (one owner) or a general partnership (2 or more). These entities do not require any filing or fees to start up, are not taxed separately, and do not pay the state franchise tax. To most small businesses the tax and liability aspects of the other business forms offer no real benefit. For larger businesses, particularly if ther will be investors not working in the business, then you should investigate a corporation, limited partnership, or LLC.
Business owners are frequently tempted to issue shares or minority equity interests in their businesses to persons who help start the business or as a reward to an important employee. This gesture is always undertaken with the best of intentions but frequently results in disaster. Do not think that so long as you maintain control (i.e., 51%), there is no negative consequence in relinquishing minority ownership interests. Once equity ownership is transfered to another person, you can't get it back. Even minority shareholders who have no control have significant rights; and controlling shareholder owe significant legal duties to them. People and circumstances change in ways that cannot be anticipated. Once there is a minority shareholder, the majority shareholder can no longer say or think "It's my business; I can do as I like." Legal disputes with unhappy minority shareholders are costly and destructive to the business. If the business can be structured in this way, it is always far better to keep 100% of the equity and reward important employees and associates with money or "phantom stock," bonuses tied to the value of the equity. If sharing the equity in a small business cannot be avoided, then the majority shareholder needs to educate himself on his new duties and follow them scrupulously, and formal shareholder agreements need to be put into place to minimize future disputes. Most importantly, if the ownership is on a 50-50 basis, then the owners must structure in advance the mechanism to decide a question when they disagree. A deadlock on the board of directors of a company is a guaranteed law suit and most likely the end of the business.
Yes. Most small corporations are run informally, and the share certificates are never signed and distributed. Many small corporations buy a "corporate book" at inception, put it on the shelf, and never open it again. The share certificate is not what makes you a shareholder; it is merely written evidence of your ownership. If there was an agreement that you own a share interest in the company, then you do. As a shareholder, you have the right to have the certificate issued, but it is the agreement that makes you a shareholder, not the piece of paper. Obviously, if there is a dispute about whether you are a shareholder, then you would be in a better position if you had a certificate, but your ownership can be proved in other ways: testimony, corresondence, bank documents, tax returns, etc.
A variety of resources are available on this site both for lawyers and business owners. Start by reviewing the index page for Business Owner Resources.
The author of this site consults with business owners and attorneys on issues of shareholder oppression and disputes among shareholders and business owners. Please contact the Fryar Law Firm, P.C. to discuss services available and rates for consultation.