Legal Considerations for Restructuring a Business

March 07, 2017

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Successful companies evolve over time. It may be necessary to restructure the ownership, legal organization, or operational processes of a company in order to make your business more profitable.

You may need to perform one or a combination of the following actions:

  • add partners
  • remove partners
  • modify ownership interests
  • change the business entity structure
  • sell assets
  • refinance loans
  • change operations
  • add new verticals
  • remove unprofitable ventures
  • reorganize business functions
  • renegotiate contracts

Restructuring is usually driven by economic or tax reasons, and is more likely to be successful if the business owners understand the fundamental business problem or opportunity that their company faces. Typical problems include:

  • profit margins shrunk for an extended period of time
  • customers are leaving and are no longer satisfied with the business’s products or services
  • the current systems no longer work or are inefficient
  • team members are overworked or underutilized
  • the industry is evolving

Adding owners, removing owners or modifying ownership interests

Understand the impact a change in ownership has on a business’s decision making processes, finances and taxes. Review the requirements in your company’s organizational documents before making any ownership changes. Update or amend the organizational documents so they correctly describe the rights and responsibilities of the owners and accurately reflect each owner’s interest in the business. If there is more than one business owner, it is important to have a buy-sell agreement specifying how the remaining owners can buy out a partner who leaves the business for whatever reason, whether the departure is voluntary or involuntary.

Changing the business’s entity structure

The legal entity structure that was appropriate when you started your business may need to be changed as the business grows and revenues increase. For example, an LLC may switch to a C corporation in order to raise money from investors, a sole proprietorship may choose to become a limited liability company in order to minimize the owner’s personal risk in the event a client sues the business, or an LLC or corporation may make an election for tax purposes to be treated as an S corporation to minimize taxes. You will need to comply with the applicable legal requirements and your entity documents to implement these types of changes.

Selling assets

Sales can be complex. Usually, the parties draft a business contract stating how the sale will be organized and conducted, which assets will be transferred, how the buyer will fund payment, details regarding approvals by the owners, and provisions regarding liabilities and warranties. It is also important to understand the tax consequences of the sale.

Renegotiating contracts

Whenever you make changes to an existing contract, be sure to document the new agreement in writing and have it signed by the parties.

Business owners should consult with their legal advisers for interpretation of specific requirements concerning reorganization.  For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

Topics: Legal

Kathy Tremmel

Tremmel Law

Kathy Tremmel has significant experience both as a business attorney and corporate executive. Her career spans both legal practice and business management and she opened her own solo law practice in January 2010. In additional to running her own practice, she also is of Counsel with Selman, Munser & Lerner, which is a business transaction law firm in Austin, Texas. Ms. Tremmel has more than 10 years’ experience as a business attorney, providing transactional legal services to a diverse client base, from start-up ventures to well established companies. She helps companies with all their contracts, including customer agreements, non-compete agreements, employment agreements, buy-sell agreements, loans, and leases, helps people set up new businesses, and represents buyers and sellers of businesses. In addition, Ms. Tremmel has 10 years of management experience working with start-up companies. As VP of Operations at Tusker Group, an international litigation support company, Ms. Tremmel led international teams, managed production and quality issues, handled price negotiations, worked closely with clients to determine the scope of their projects, provided project management services, and developed, implemented and documented best practices for processing and training. Ms. Tremmel earned a Doctor of Jurisprudence from the University of Colorado School of Law and a Bachelor of Arts from Dartmouth College. She is a Texas licensed attorney and a certified Project Management Professional.
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