In Texas there are specific requirements for the chosen business distinction of a corporation regarding ownership, governing structure, bylaws, tax requirements and defining what is considered a corporate asset including in some cases a “client list.” A client list can significantly impact the value of a company, and if the partners decide to split at some point, there can be a legal dispute as to who maintains control of the client list. If one of the partners decides to buy the interests of the list when moving on to another entity, it will be based on a determination of value and if there can be an agreement regarding the continued business of the clients for the current company versus the new entity. It may be a smoother transaction with the assistance of a skilled business attorney. The value of the corporation and the change in structure will also affect the way it is taxed.
Restructuring of a Texas business entity is often necessary due to changes in ownership, disputes between partners, or simple advancement in the market to keep up with current business trends that may increase the value of a corporation. Activities in a restructure include:
- Adding or removing partners.
- Changing corporate structure in line with latest tax laws.
- Defining new operation changes.
- Selling or purchasing assets.
- Modifications of business owner’s interests.
- Renegotiation of internal and external contracts.
- Division of company assets including client lists.
It is important for all parties to understand any changes and how they will impact future growth, finances and taxes. In order to make the best decisions for the original company and address the needs for the new entity including the efforts it took to attract and maintain clients by each of the owners is important to resolve before making any ownership changes. Organizational documents will need to be amended to reflect any and all changes to the business, and tackling the division of assets is very important for the continued success of the existing entity, and the future success of the new entity.
During a company split, the selling or division of assets will be an important topic to be addressed. A business contract will need to be drafted to specify how the sale is organized and what assets will be transferred to the new owner, including client list. The sale will need to be approved by principals and agents in accordance to what value of the corporation the exiting partner will take.
Client lists and non-compete.
The value of a business entity often depends on the clients as they bring a certain amount of income to a business, either monthly or annually. Whenever possible a cost-benefit analysis should be undertaken to calculate profits for each individual client. It will be important for both companies to survive the split by 1) retaining valuable clients, 2) addressing client costs, and 3) determining present and future income from clients. A non-compete agreement is a legal agreement between an employer and an employee regarding business activities that are conducted that may have business secrets or proprietary information that should not be given to anyone outside of the business. It is a contract where an employee promises not to enter into competition with another employer until the employment period or non-compete duration clause is adhered to. In most instances, employees, contractors, and consultants have to sign these types of agreements. These will need to be reviewed regarding the ability of the leaving partner to keep client list rights.
Hire an attorney.
Each type of business structure except for a sole proprietorship will have some type of agreement, either formal or informal, with regard to all business activities. A strong corporate attorney will be a valuable guide during corporation changes involving a split and division of client lists and changes to taxation.
Henrichson Law, PLCC
222 W. Cano St.
Edinburg, TX 78539