Regardless of the type of entity, every business has or should have (more on the
should aspect below) a governing document that is at least a basic agreement among its owners that governs (1) the operation of the business and (2) the owners’ contractual rights, obligations, and restrictions with respect to their ownership interests in the business. The second of these contains what are commonly referred to, by lawyers at least, as the “buy-sell” provisions. If for some reason the owners decide not to enter into a written governing document, then the statutory default provisions of the business’s state of formation (which vary from jurisdiction to jurisdiction) automatically govern the entity and the owners. For example, if an owner of a limited liability company is determined to be legally incompetent to manage their affairs and the business either doesn’t have a governing document or that document is silent as to the treatment of an owner’s interest in the event of legal incompetence, what happens? Under Delaware law, the most widely recognized state of formation for businesses, the owner’s personal representative can effectively step into the owner’s shoes as an owner, thereby resulting in a previously unrelated (and likely inexperienced) third party having an active ownership interest in the business.
