To prevent an uncomfortable and embarrassing separation, the owners should agree on how to separate before joining together. Very similar to a prenuptial in marriage, a ‘Cross Purchase Agreement’ identifies the various business issues to address such as valuation of the ownership position, the respective form of purchasing the departing ownership and time period of payout.
A term used with partnerships and limited liability companies identifying the financial value of the respected partners or members. The basic formula is beginning balance plus contributed capital plus earnings less withdrawals.
The shareholder agreement lays out the rules of the relationship between the shareholders of a company. Most often the agreement is poorly written because the legal team fails to understand the business aspect of each of the respective sections. One of these sections is referred to as the Article of Capitalization or commonly called the Capitalization Clause.
A ‘Capital Account’ is a term used in partnership and in limited liability company business formats. It refers to the individual balances in the equity section of the balance sheet. The basic formula for value is beginning balance plus contributed capital plus earnings from the current accounting period less any withdrawals