Starting a Business with Others? Plan Ahead to Avoid Being Stuck to Your Former Best Friend
When starting a business, many individuals realize the importance of creating a new business entity (corporation, limited liability company, or limited partnership) to reduce and eliminate personal liability for unexpected events and unfortunate outcomes. It may be difficult to imagine the gamut of potential issues when forming a new business entity, but planning ahead should extend past the filings you may make with the State to set up your business.
It is equally important for you to plan ahead to avoid or eliminate internal problems and management issues that may arise when you start a business with others. It may be difficult to raise this subject with other founding owners, partners, or members; after all, no one likes to consider that starting a business may result in a rift between friends or family. Starting a business involves a great deal of risk and stress – you may not be able to predict how your fellow business partners will react to this pressure. If you set clear expectations, duties, authority, and even a possible off-ramp for you and other business partners, you may save yourself even more stress in the long run. Even in a small business started by friends or family, you should create a governing document to establish each owner, member, or partner’s rights and responsibilities.
Indeed, if you are a minority stakeholder in a business, it is especially critical that you contractually protect your rights and remedies in the company. For decades, Texas law allowed a minority stakeholder in a closely held company to sue and seek a buyout when faced with an “oppressive” shareholder. This changed in 2014 when the Texas Supreme Court held that a minority shareholder has “no statutory right to exit the [business] venture and receive a return of capital.” Ritchie v. Rupe, 443 S.W.3d 856, 867 (Tex. 2014). Through this opinion, the Texas Supreme Court dramatically curbed the ability of minority business owners to seek legal redress for oppressive conduct by a majority owner. Instead, a minority shareholder’s legal recourse against an oppressive stakeholder is now effectively limited to the following causes of action: (1) an accounting, (2) breach of fiduciary duty, (3) breach of contract, (4) fraud and constructive fraud, (5) conversion, (6) fraudulent transfer, (7) conspiracy, (8) unjust enrichment, and (9) quantum meruit. Id. None of these legal remedies require the oppressive stakeholder to return the minority shareholder’s capital. Throughout the Supreme Court’s analysis in Ritchie, the Court repeatedly stressed that owners of a closely held corporation can contract to expressly deal with issues that often arise in the context of closely held corporations. This curtailment of shareholder rights may effectively leave you stuck in a business where you do not have any management authority.
If you are starting a business, you have a myriad of legal issues that you should consider and guard against, including contractually setting forth the rights and responsibilities of each owner of your new business. At The Gibson Law Group, P.C., we work hard to help you protect your legal interest at the outset of your new business, in order to prevent and eliminate later litigation and disputes.