R. Shawn McBride recently spoke about changing ownership of your company. Here is the transcript: https://www.facebook.com/rshawnmcbridepublic/videos/1498225340209367/
Folks, Shawn here with you, talking about changing ownership of your company, and this doesn’t matter whether it’s an LLC, or a corporation, although we’re gonna focus probably a little more on the LLC, and what we’re seeing there. But one of the things we need to be realistic about with our companies is we know the ownership is possibly going to change. Now, for single-owner companies, this may be simple. You may not have an ownership change until you want to exit the business. But for other companies with business partners and multiple parties involved, we know that ownership changes part of the game. People are gonna be coming and going. Partners may come and go. We may need to incentivize people to join the company with equity, and all kinds of things are gonna happen along the life of the company to evolve it, and we need to be realistic about ownership change.
So, one of the things we need to talk about is, how does that happen? In a corporation we typically have stocks, so we’ll issue a certain number of shares in the beginning. We need to make sure there’s a sufficient number of authorized shares. These are the shares that we tell the state that we’re gonna issue. We need to make sure there’s enough of them to allow for our growth and our evolution, so we may issue 1,000 shares or 10,000 shares when the company is initially formed, and then if we want to bring other people in, and change the ownership structure, there needs to be enough authorized shares there to give them additional shares, so that we don’t go above that number.
One of the things you want to avoid under corporate law is having more issued shares than the number of authorized shares. A lot of bad things can happen there, just a very simple thing to check the box on legally, if you want to make sure to… in LLCs something interesting comes up. LLCs are creatures of contract, and of course, we’ve talked a lot about the use of internet forms, and some of the problems with them. And one of the things that’s very common with a lot of these internet forms, is they denominate the ownership in percentage interests. And that’s fine if you have one, two, three owners, and everything’s very static, nothing changes. One owner might own 10%, one owner might own 90%, 80, 20, whatever the percentages are, if those percentages are very static, very simple.
But if we’re to have evolving ownership, then we want to use units. I recently did this for a client. We converted them from percentage in interest to units, because they were gonna be changing the ownership percentages as they brought new assets into the company. New assets were coming in. They were gonna issue equity, or units, in exchange for that. By using the units instead of the percentage interest, we’re able to give more units or shares to the new owners, rather than have to reallocate the percentages, and get everybody to agree to that constantly. The management structure can issue those units rather than having to have to amend the LLC group every time. So these are the kind of things you can get ahead of early. Start thinking about using units instead of percentage interest, and practically for most business owners, let’s just be honest, I mean you’ve got a business to run, you’ve got a product to develop, you’ve got commercialization to do.
This is really your lawyer’s issue. But it’s something you wanna keep on the radar, and this is why you want to get a good team behind you, because you want to be looking forward to these issues. These are the kind of things that’d be done early, and easily if you build them in early in your life of your company, if you know where you’re headed. If you wait till later till you have an acquisition pending, or some other major transaction where you try to bring that owner in, you might end up with a lot of negotiation and restructuring, a lot of legal costs, and that’s just not good. So, think ahead about these issues. Start getting ahead of it. And when you do that, you’re gonna avoid the problems before they happen.
So, I hope that’s helpful, I hope that gives you another seed to think about as you’re building your company. Check out our blog, www.mcbrideattorneys.com/blog, or www.mcbrideforbusiness.com/blog. We deal with a lot of these issues, and really love to get you ahead of it. Check out my YouTube channel at McBride for Business, and of course, make sure you’re following the R. Shawn McBride page on Facebook, where we can deliver more great content like this and help you. And I’d love to help you and your audiences with this. Reach out to us, 214-418-0258. Talk to you soon.
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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Craig Hauger.
About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment (www.rshawnmcbridelive.com/3laws), gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can reach R. Shawn McBride at firstname.lastname@example.org or (214) 418-0258.
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