Just like a newlywed couple, you and your business partners never go into a venture expecting it will end. Instead, the business starts with excitement and dreams of success. Sure, the statistics say you’re likely to fail, but that won’t ever happen to you, right? Here’s the problem – it does happen. And it happens a lot… More importantly, in a business divorce, it may not even happen because the business failed. In fact, sometimes it happens because of the business’ success and not its failure.
Here’s the problem – just as many newlyweds have failed to draft a prenup, so too have many business partners. Then, when the foundation starts to crack and the problems arise, they’re left guessing what to do. No matter what business form you choose, you should always have a good operating agreement drafted. And this agreement should do more than just describe what to do if something goes wrong. It should be the document that is the roadmap to your success. It is your opportunity to set up the guidelines that will help you and your partners build the business in such a way that everyone stays happy and reaps the rewards of the venture.
So, what should your operating agreement cover? Here are a few essentials:
- Who’s managing the thing and what are his or her responsibilities?
- Are you going to allow more members? If so, how can they be added?
- What are the contribution requirements and how does that translate to ownership percentage?
- How are you going to deal with transferring ownership interests? Do you want to place limits? Do you want the business to have first crack at buying an exiting member’s interest?
- Voting – How? What? When? Where? …and the big one – who’s responsible for counting and keeping records?
- What are the triggering events for dissolving the business? Procedures? Who gets what?
These are just a few starting points – this is your agreement and can cover (basically) whatever you want it to cover…that’s the beauty of it! Our advice – invest the time and money to have a skilled business attorney draft your agreement to your unique needs. Don’t settle for a template document. Even if you’ve been in business for twenty years, if you don’t have an operating agreement, get one! You never think you’ll need one until you do – and then it’s too late. And, unlike marital divorce, a business divorce doesn’t even have the benefits of residual love, no kids to preserve the relationship – just anger and confusion. Save yourself the headaches and make the investment early.