The Biggest Mistake When Incorporating

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Contact John L. Williams

Wilmington, DE

Practice Areas: Business, Estate Planning

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A Delaware LLC or Delaware Incorporaiton Without an Agreement Among Owners

"The only ship that does not float is a partnership."

"It is easy to give it away, it's hard to get it back."

These are words to live by when starting a business because they focus the entrepreneur's attention on future problems, being a victim of one own's success, when paths diverge in what began as a plan to climb a mountain and ended up being a debate between slow and steady or fast and risky.

Entrepreneurs are a special breed. They have confidence to take risks in the face of uncertainty, entering uncharted waters. They often enter into a business with confidence in the demand for the goods or services they intend to offer. Incorporating an LLC or traditional corporation is the foundation of that business enterprise. Although some mistakes can be corrected later, when business partners are involved it is especially important to get the formation documents right, including a stockholder agreement for a corporation or operating agreement for am LLC. These documents may prevent costly fights later because they contemplate situations where an owner is no longer participating in the business or dies. It serves as a pre-nuptial before the business marriage to govern future problems.

Paper is cheap and lawsuits are expensive. While even the best Operating Agreement or Stockholder Agreement cannot stop every future lawsuit, it may avoid the more common causes. This document should be reviewed by you with your business planning attorney (other than the company attorney) to cover particular aspects of the agreement to protect you. Do not share ownership in 1) a corporation without a stockholder agreement or 2) in an LLC without an operating agreement. Failure to have such an agreement would be the biggest mistake you could make when incorporating.

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