What is a Pre-Incorporation Agreement?
If you are thinking about starting up a new business in San Diego with some friends, or maybe you have decided it is time to move from a partnership into a more formal corporate entity, it is often wise and useful to have a pre-incorporation agreement with your business partners and associates. As the name implies, a pre-incorporation agreement is an agreement — a contract — by and among the various partners and colleagues who will be the owners of the new corporation. These types of agreements can be used for any type of corporate formation such as a limited liability company or corporation. A skilled and experienced corporate attorney can help custom-draft an agreement that will meet the unique needs of your soon-to-be new business.
Here are the essentials that should be in your pre-incorporation agreement.
San Diego Corporate Law: What Should be in Your Pre-Incorporation Agreement?
The purpose of a pre-incorporation agreement is to reduce future disputes that might occur because of wrong assumptions and misunderstandings between and among the owners. Furthermore, the agreement can help “manage expectations” and by establishing various rules of how disagreements are to be resolved. Essential provisions include:
- Proposed timing of incorporation and WHO will do the incorporating
- Who is “in charge?” — who are expected to be directors, executive employees, etc.
- Proposed job duties and pay of the various owners — this is often a key part of pre-incorporation agreements; if everyone is expecting to be the CEO, there is a problem
- Nature of business — including expectations related to future expansion
- How are disputes to be managed? — majority vote, super-majorities, vetoes, mediators, and similar mechanisms
- Expectations with respect to pay and “draws” from the company’s bank account(s)
- Proposed rules with respect to use of company assets
- Capitalization requirement and expectations
- Expectations with respect to financing — is financing expected? Who (if anyone) will be expected to sign personal guaranties?
- Who can be an owner? How and who approves new owners?
- Agreements with respect to voluntary and/or mandatory and/or limits on buying/selling ownership interests
- Provisions with respect to control of the corporation in the event of death — heirs, family members, etc.
- What is the expected tax status?
- Is there an expected end-date for the company?
- Who handles accounting and legal work for the new business?
- Proposed assets (if any) to be turned over and who maintains ownership
- Proposed new assets (if any) to be acquired
After the pre-incorporation agreement is hammered out and signed, then based on the expectations of the parties with respect to timing, the new corporation or LLC or other corporate entity can be formed. A well-drafted pre-incorporation agreement will help in making the startup or transition as smooth as possible. Likewise, the agreement can form the basis of a later Owner’s Agreement or can be used “as is.”
Call San Diego Corporate Law Today
If you need legal advice relating to drafting a pre-incorporation agreement or with respect to setting up San Diego corporation or LLC, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for 2015, 2016, and 2017 by SuperLawyers.com. Mr. Leonard can also help with the annual maintenance requirements and with any other business-related legal matter. Contact Mr. Leonard by email or by calling (858) 483-9200.