Types of Common Contracts
Buy Sell Agreements
A buy-sell agreement is a binding agreement that commits an equity owner in a business to sell, and the business entity, or other owners of equity interests in the business, to buy the owner’s equity interest in the business at a specified price and terms at some point in the future when a triggering event occurs.
Some buy-sell agreements give the business itself, or the other equity owners the option to purchase a certain owner’s interest upon the happening of a triggering event. However, there are other types of buy-sell’s where an equity owner can actually require the business or the other owners to purchase his interest from him on specified terms and conditions.
What do these Agreements do?
These agreements can protect business continuity by providing a roadmap for transference of an interest upon the occurring of certain event, they provide harmonious relationships between the owners, provide a means of delivering liquidity to an owner who leaves the business. They also create private markets for the business interest where, otherwise, one might not exist. These agreements further set the terms of the purchase and sale of the business interest in that private market.
Shareholder’s Agreements and Operating Agreements
Typically buy-sell agreements are found within broader Shareholder’s Agreements between the owners of a Corporation or in the case of an LLC, in the Operating Agreement.
Why use a Buy-Sell Agreement?
In a business with a 50/50 voting split possibility, the buy-sell will typically provide a means of resolving a deadlock between the parties where irreconcilable differences are preventing the business from moving forward.
Buy-Sells usually will restrict ownership in the business to people that are acceptable to the current owners. This way, no one gets a partner they didn’t bargain for.
Buy-Sells can also restrict ownership in the business to active participants in the business. This is done by requiring a buy-sell event when an owner is no longer active in the business, whether by retirement, disability, death or otherwise.
Buy-Sells will also restrict ownership where law or tax issues require that the ownership be restricted. This is true in Subchapter S Corporations where there are limits on who the shareholders may be. Also, in a Professional Corporation or Professional LLC, only certain people may be owners pursuant to statute, and the buy-sell agreement will ensure this.
Buy-Sells further provide liquidity to the departing owner by ensuring a market for the business interest and providing a source of funds to fund the transaction, in some cases. The Agreement can determine the price, source of funds, and payment terms in advance.
Buy-Sells of a deceased owner’s portion of the business can, if certain requirements are met, fix the value of the interest for Estate Tax purposes.
Employment Agreements govern the relationship between an employer and an employee during the course the performance of the employment duties.
Some things to consider when creating an Employment Agreement are:
Any Bonuses or Incentive Compensation and details of each
Location and specific Duties of the job
Employment At-Will or for a Definite Term
Covenants Not to Compete (Reasonableness) and Non-Solicitation Clauses
Confidentiality Clauses/ Trade Secrets
Intellectual Property concerns
Conditions precedent to formation of employment relationship
Employment Agreements can be fairly complicated despite the usual topics covered within. It is always wise to have an Attorney review an Employment Agreement before it is entered into.
Operating Agreements are the governing documents of Limited Liability Companies in North Carolina. They are typically very comprehensive and cover a variety of topics governing the relationships between the Members and each other, and the Members and the LLC.
Even the simplest of Operating Agreements will typically have a Definitions Section, a Formations area stating how the LLC was formed, a Section describing Capital Contributions to the LLC from the Members, a Section on how income will be Allocated between the Members, a Section on how Distributions will be made to the Members, a Section covering Management of the LLC and possible Meetings between Members and Managers, a Section on Transferability of Interests, usually including a buy-sell type agreement, a Section on Dissolution of the Company, a Section on Fiduciary Duties, Term of the Agreement, Dissociations of Members, Record Keeping, Member Representations, and General Provisions including some sort of Dispute Resolution section.
Depending on the needs of the LLC and its owners, Operating Agreements can look extremely different from one another. There is really no boilerplate operating agreement, which is why it can be a very bad idea to download a form operating agreement online and use it for your business. These agreements must be tailored specifically to the individual business.
Avoid playing around with standard forms. See a North Carolina Business Attorney.
Independent Contractor Agreements
In today’s economy, Independent Contractors are widely used, particularly by small businesses. When doing business as a Contractor or when hiring a Contractor it is vital to have a good Agreement in writing covering the terms of the relationship between the parties.
These Agreements will state the purpose of the agreement, provide a detailed description of services to be performed, define the relationship between the parties, provide some standard of performance under the agreement, provide consideration for the services rendered and payment terms, define the term of the agreement and how it can terminate, along with many other “standard” provisions.
The Independent Contractor Agreement is an extremely vital document if there is ever a question as to the status of the Contracted Party. Oftentimes issues arise as to whether the Contractor is actually an employee of the hiring party. A misclassification can have devastating consequences.