The Importance of an Operating Agreement

By Andrew Randol - October 25, 2018 - Corporate & Business

Like a couple engaged to be married, when two or more people decide to start a business together, they are usually bristling with excitement and enthusiasm. Leave it to us attorneys to rain on your parade. Like some marriages, business partnerships can fail. Even if a business is doing well, personalities clash and relationships become strained. Sometimes the partners have known each other for years and wholeheartedly trust one another. Maybe they grew up together, were college roommates, or perhaps they’re even family members. However, after creating and running a business together, daily interaction among the partners will change drastically and test the strength of the relationship in new ways. Rather than drinking a beer and discussing the game, the partners now spend their Friday evenings discussing accounts receivables or contentiously debating the new product line. Many will pull through and make it, others will fold and “divorce.”

Like marital assets, the divorced business partners will fight over the assets of the company. Will one partner keep the business and the other get cash? If so, how much? Will each start their own spin off business? If so, who gets the company’s clients and accounts? Does one spin-off get to keep the old name? Like a prenuptial agreement in a marriage, a well-drafted operating agreement will provide answers to these questions.

If this article has not already depressed you aspiring entrepreneurs enough, read on. Let’s suppose two business partners make it past their personality issues and learn to work well with each other. The business grows and prospers and will be the primary source of income for each partner and their families; it pays the mortgage, puts food on the table, and pays private school tuition. Unexpectedly, one partner dies in a fatal car crash. What are the business’s obligations to the deceased’s family? Does the widow/widower assume fifty percent ownership in the company even though he or she previously had no significant involvement in managing it? Must the surviving partner buy-out the deceased partner’s interest? If so, how much is this going to cost, and must it all be paid in one lump-sum? Or, does the widow/widower simply become an absentee partner and collect income based upon the deceased’s interest in the business? Again, a well-drafted operating agreement will provide answers to these questions.

The scenarios above are some of the many things that can go wrong in a joint business venture. However, beaming entrepreneurs often fail to consider such issues amidst their enthusiasm, optimism, and eagerness to get started. Serious, but foreseeable, issues like partner disputes, personality issues, death, or in some cases theft, fraud, or wrongdoing by one partner are often not considered before the partners dump a truckload of money and time into their new business. The polar opposite of entrepreneurs at times, attorneys are trained to be cautious and worry about the worst-case scenarios.

Before jumping into a joint business venture, contact a competent Columbus business or corporate attorney. Although we are certain to temporarily dampen your enthusiasm, competent corporate counsel will take the time to understand the nature of your business venture and walk you through some of the above scenarios. This allows a competent Columbus business attorney to custom tailor an operating agreement to fit your business’s specific needs and goals. A general one size fits all agreement from an online legal service is likely to fall short should your business be faced with a difficult challenge years down the road. A business attorney can draft a custom operating agreement that works for you and your business and can withstand the test of time. Contact the business lawyers at Stevens Law Firm, Ltd. to discuss how we can assist you and your new business.