South Florida Hospital News
Thursday January 18, 2018
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August 2007 - Volume 4 - Issue 2

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Guarding Against the Mortality of Your Business

Recognizing that the readership of this newspaper is made up of health care professionals, I am sure the readers are well accustomed to speaking to patients about having periodic and routine health checkups and making sure that patients, especially those progressing in age, do things to promote their health with an eye towards avoiding illness and even death. There will also no doubt be discussions about estate plans, living wills, and health care surrogates.

Business owners and managers reading this article should consider when they last considered the mortality of their businesses and planned for it. Does the company have governing documents setting forth rules to address disputes between the owners or the death or disability of an owner? If your business hasn’t had a check up from this perspective, hopefully this article will prompt you to do so. Business owners have dreams of being financially successful, but are often unwilling to include legal business planning in their startup budget. Besides executing vanilla articles of incorporation and bylaws, many companies do not follow corporate formalities, putting the owners at risk for the personal liability they sought to avoid.

Even if you previously executed a shareholder or partnership agreement, growth or changes to your business may warrant changes to that document. If you started the business on a shoestring budget, it is not too late to insert procedures for dispute resolution, and for dealing with the death or disability of an owner, until the dispute, death, or disability has already occurred. It will be far easier to agree on reasonable terms while the business relationship is healthy. Sure there will be expense, but paying for preventive medicine is surely going to be cheaper than paying to treat illnesses that have spread because of the failure to go for regular check ups.

As an attorney who focuses his practice on counseling parties to business disputes, I am no longer surprised when I am told by a client that she has no shareholder agreement, and she and her co-owner each own 50% of the business. When told of a management dispute, my response will often be you are deadlocked, and the solutions to resolving the deadlock are usually difficult to achieve and costly because no one wants to give in. Instituting common place ground rules and procedures for dispute resolution in advance should minimize litigation or guard against owners taking unreasonably positions.

It is also common for me to meet business owners who tell me that their companies have no documents setting forth procedures to deal with the death or disability of one owner. It is too late to do basic legal business planning when the death or disability of one owner has already occurred.

Every company, however small or new, should have a shareholder agreement, operating agreement, or partnership agreement. The title of this document will depend on the form of the business entity. That document should contain provisions to address what happens to an owner’s interest upon his death or disability. It should also contain provisions to address how disputes will be resolved between the business owners, especially where a business is owned 50-50.

It is important to consider employment agreements for certain business owners that are tied to the shareholder, operating, or partnership agreement. Termination of employment triggers rules regarding the tender and purchase of the employee-shareholder’s interest in the business.

Linking termination of employment to the buyout of the discharged employee-owner is also important to avoid the circumstance whereby that person is discharged but remains an owner entitled to a percentage of profits. On the flip side, the employee-owner will have a document that protects her interests in the event that the other shareholder(s) attempt to terminate her employment without cause.

Basic legal business planning, especially for the valuable practices of healthcare professionals, can help eliminate financial stress in the event of death or disability of an owner. Attorneys recommend the inclusion of a buy-sell provision in the owners’ agreement. Provisions should be included that describe the manner in which the deceased or disabled owner’s interest will be valued both for a voluntary or involuntary buyout.

It is also recommended that companies procure life and disability insurance which will be tied to the buy-sell provisions. Typically the company owns the policies and pays the premiums. Death and disability will be triggering events for the buyout of one owner’s interest. Insurance provides funds to finance the buyout. Otherwise, the company or other owners may lack the necessary funds for the buyout and continue in business. The rationale for procuring life and disability insurance to benefit the business is really the same for buying insurance to benefit spouses and children in the event of death or disability. We do it because we care for the people that will be affected. If we have built a strong business, we want to see it continue to flourish after we are gone.

Your ultimate focus should be on sitting down with your fellow business owners and mapping out ground rules to benefit everyone involved. Obtaining assistance from a qualified attorney in drafting documents setting forth these ground rules is as important as an annual physical and painless as a flu shot administered by a qualified health care professional.

Jonathan M. Streisfeld, a Partner with Brinkley, Morgan, Solomon, Tatum, Stanley, Lunny, & Crosby, LLP, can be reached at (954) 522-2200 or at jonathan.streisfeld@brinkleymorgan.com.
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