In closely owned corporations or limited liability companies, it is imperative that the parties think through from the beginning of their relationship. Parties should provide in their shareholders’ agreement, or in their operating agreement what will happen if additional, perhaps unanticipated, owner-funding will be required in the future. Should each of the owners be obligated to contribute more money? What form should the contributions take? Will they be deemed loans to the company, or will they be deemed additional capital contributions? If they will be deemed additional capital contributions and not all the owners contribute pro-rata in accordance with their ownership percentages, will the contributing members’ funding serve to dilute (or reduce) the non-contributors ownership interest in the company?
If so, to what extent and under what conditions? Contract drafting is much like a game of chess.
The drafter should try to anticipate every possible future scenario and provide the parties’ agreement as to how to address it. This is by far the most effective mechanism to avoid litigation.
Bottom line is that well-drafted Agreements are imperative to the success of any company.