Having a strong need to be in control is something that might land you on a therapist’s sofa, but could also save your business. Our office deals with many disputes among small business owners, managers and investors. Top priority in any of these disputes is to determine who is in control of the company. The question is rarely as simple to answer as you might think. Protecting your ability to control your business is essential in surviving a power struggle. Even better, a well documented control structure can even head off a power struggle.

Control at 100% Ownership. The most iron-clad method of maintaining control of your business is to be a sole-owner. Obviously, if you control all of the stock you can vote off any officer or board member who makes a power-play. But being a sole owner does not prevent you from bringing on investors. Instead of selling stock, the company borrows from investors. Some investors have no interest in the day-to-day operations of the business and would actually prefer to lend. The investors may bring requirements like security interests against company assets, etc. but they do not gain any control over the business by way of simply being a lender. Properly documenting these lender relationships is critical.

Control at 51% Ownership. A second option is to maintain a 51% majority ownership. This way you can still outvote all other investors combined but you are able to bring in at least some capital without borrowing. You need to use caution in this strategy, though, because certain decisions (like the decision to amend articles of incorporation or dissolution) require a greater majority than just 51%. Also, depending on the number of directors you have in a corporation, you will not be able to control the entire board with just a 51% majority because of a concept known as cumulative voting. Each of these issues can be addressed in a good set of by-laws and a shareholder agreement. So the 51% majority is a good strategy, avoids borrowing, but requires good documentation to keep you in control.

Control at 1% Ownership. A third option is to create a non-voting class of stock. This is easily done in a limited liability company (LLC), but requires care in a corporation. Most small businesses formed as corporations have made an S-Corp election. This provides significant tax benefits to the business owners. But you will lose your S-Corp status (and the tax benefits) if you create two classes of stock with different economic rights. Voting stock and non-voting stock are allowed, but each class of stock must have equal rights to profits, losses, distributions, etc. The main advantage of non-voting stock is that you can maintain a 1% ownership and still control the entire company as long as the other 99% is non-voting. This option requires careful documentation just like the 51% option, and may require amending your articles of incorporation on file with the state.

Each of the options above carries with it certain benefits and certain drawbacks. Ultimately, if you are seeking investors, the plan you go with is the plan that attracts the right investors. The best plan in the world means little if you can’t get investors to buy shares. There are many options available to a small business owner seeking to bring in additional capital without losing control of the small business. In selecting an attorney to assist you in the process, it is important that you work with someone who has experience in both corporate formation and corporate litigation. An attorney who has fought through a power play is much better equipped to help you avoid one.