North Carolina business law primarily involves business entities like corporations, partnerships, and limited liability companies (LLCs). Each type of business entity is governed both by specific sets of laws (e.g. - the North Carolina Business Corporation Act, the North Carolina Limited Liability Company Act, etc.), as well as more general legal principles. These general legal principles include everything from the North Carolina Unfair and Deceptive Trade Practices Act and the North Carolina Uniform Commercial Code, to the common law regarding contracts, real estate, employment, intellectual property and so on. While there are many off-the-shelf forms out there to give you a head start on formalizing your business entity, the fact is that if you don’t understand these documents completely, then you have no way of knowing if they truly protect you or not.
When taking the legal steps to form a new North Carolina business entity, you need to consider much more than “outside” liabilities (debts owed for supplies, rent of your business location, and so on). The biggest concern you will -- or should -- have concerns the “inside” matters - issues that arise between and among the various owners involved. By far the most hostile and most costly business litigation matters involve suits by and among partners, shareholders and LLC members.
It is on these inside matters that much of your success in business will rest. This is because if your business fails, you will probably have signed personal guaranties on your outside business debt. Your LLC or corporation cannot help you if you’ve personally guaranteed the debt.
When your business is successful, that is often where the real problems begin. It is harder to be successful than to fail. The more money involved, the more likely it is that people get greedy, or a partner wants to expand in one direction, another wants to do something else. One may wants to “cash out” while another wants to re-invest profits. And on it goes. And when these frictions arise, any disputes you have will be governed largely by terms set out in your company’s bylaws, or the partnership agreement, or the operating agreement. This is why it is critical that these documents say exactly what you need them to say, and that you understand what they say.
In a worst case scenario, you could even find that when your business partner runs off to another state you have no legal method for ejecting them from the business. Check your off-the-shelf form to see if it covers that scenario. Odds are you will not find it addressed. If you own a North Carolina LLC, I can already tell you that the law does not address it. If you didn’t cover this in your operating agreement, you will end up writing a painfully large check to somebody you don’t like, just to be able to move on with your business.
Leaving these matters to be decided by “something you got off the internet” or bought from an office supply store is a very dangerous game. By far the worst outcomes we have seen for business owners have involved poorly drafted -- and in some cases, non-existent - corporate bylaws and LLC operating agreements. In the past two years we’ve spent a great percentage of our time on lawsuits between shareholders and LLC members, and in each one, the cost and complexity of the case was made much worse for all involved due to off-the-shelf business documents -- or none at all.
KERNER LAW FIRM. BIG PICTURE. BOTTOM LINE. SM