Mind your own business: use an agreement.

• Author: Clerici, Guy F.
• Position: The 2002 Law Journal - Business and estate planning for closely held companies

Owners of closely held businesses often describe "control of my own destiny" and "building an asset for myself and family" as their primary motivation and reward. But these goals may be myths if owners fail to understand that having proper plans in place is simply a part of minding their business. However, designing sound plans is challenging when multiple ownership involving people with differing interests and rights are involved.

These challenges can be addressed by an agreement among the parties that governs areas such as: voting and control, limitations on transfers of interest, the effects of death, disability, divorce or retirement, and competition from a current or former owner. However, this agreement must fit with each owner's estate planning for the security of family members and assure that adequate after-tax value remains from the owner's life work.

So is this agreement a business-planning or an estate-planning tool? It should be both. Otherwise, what appears to be thoughtful planning on the one hand may lead to disastrous results on the other.

A business-planning tool

Owners are often surprised to learn the power a minority-interest owner may wield. A shareholder of a closely held corporation may obtain most of its records, including confidential information. He may require shares to be purchased for fair value and request a court to dissolve the corporation to protect corporate assets from misappropriation waste or to protect other rights. Many owners enter into joint ownership without any written agreement, because they trust each other. While this trust may prove to be justified, lack of a written agreement can cause problems if shares are transferred due to death, divorce, disability or retirement.

The law generally favors the right to free transfer of any business interest. It also recognizes the importance of choosing one's business partners and protecting the value of one's share of the business. These competing legal values can be addressed with carefully crafted agreements.

For example, North Carolina permits shareholders to reach agreement as to the exercise of voting rights even if it interferes with the discretion of the board of directors. Such agreement must be in writing and may be valid for 10 years. This agreement protects majority and minority shareholders by providing a process through which issues can be resolved. This process may require more than a simple majority vote on some issues, such as certain...