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Litigating Undocumented Business Transactions

On Behalf of | Apr 20, 2016 | Business Litigation

Buffington Law Firm’s business litigation attorneys have a great deal of experience in handling business disputes among the founders of small businesses.  Normally when multiple persons decide to do a business transaction together, such as starting a new business, buying a piece of real property, etc., they will hire a lawyer to document the transaction.  For example, if three people are starting a business, a lawyer can really add value by creating the corporation, suggesting corporate bylaw provisions, documenting the election of officers, and so forth.

Failure to document the formation of a new business in proper legal form is a very common cause of business disputes.  Unfortunately, it is very common in these situations for the parties to cut corners in order to save costs by attempting to set up the new business without a lawyer.  It is an unfortunate fact that companies like “Legalzoom” and others openly advertise and advocate for new businesses to avoid the help of lawyers when setting up a business.  While this sometimes can work out, Buffington Law Firm’s business litigation attorneys have gone to trial on many cases involving business disputes between persons who set up a business together but who failed to set down in writing the basic terms of the business.  In our experience some of the more common errors and omissions have included:

  • Failure to elect directors, or perhaps the parties simply elect one director so that there is a name to put on the annual California Statement of Information form.  This is a key error because the directors of a corporation normally have the sole right to elect or designate who the corporate officers are.  Put simply, the directors run the corporation.  Selecting the directors is an incredibly important step in forming a corporation and yet often it is ignored.
  • Failure to document who the stockholders are.  One would think that this step would be hard to miss.  It is not.  Failure to document the shareholder interests of the founders of a corporation is a very common error and is almost guaranteed to lead to a future lawsuit.
  • Failure to provide for a Stockholder’s Agreement.  A Stockholder’s Agreement can deal with a situation, for example, if one of the stockholders in a small business becomes ill or deceased.  Often the remaining stockholders do not want to be in business with the heirs of such a person.  A Stockholder’s Agreement can prevent corporate control disputes in the event of many unforseen but foreseeable circumstances.
  • Failure to set terms and conditions for stock transfers or additional stockholders.  This is a very common source of future lawsuits among corporate founders.
  • Omitting terms and conditions for officer salaries and owner’s distributions.  Nothing is more common than fights among the founders of a small business as to how each of them is to realize financial gain from the business.  

This list is far from inclusive.  Buffington Law Firm’s business dispute attorneys have handled lawsuits deriving from all of these scenarios and more.  If you are faced with a situation of these types, we invite you to give us a call for a free legal consultation.  You will speak, at no charge, with an experienced attorney who can explain your rights to you in complete confidence.