It has been an interesting few weeks as we have been working with a couple of clients who are severing partnerships and going their own way. Overwhelmingly we notice the problems that arise when you do not obtain legal help in setting up a partnership or a multi-member llc and you do not have the proper operating agreements in place.
These are the typical scenarios: Best friends decide to start a business to promote a shared dream. No thought is given to how the business will be managed if one of the partners develops health problems. A husband and wife form a business together, trusting each other completely. No thought is given to what would happen with the business in case the couple divorces. For too many businesses, the llc is formed by filing the Articles of Incorporation, but the set-up stops there. The operating agreement is the important next step after filing the Articles of Organization to form the LLC.
Businesses are started with excitement and good intentions. Part of the up-front set-up, however, needs to be a detailed operating agreement including the solutions for the worst-case scenarios. The following lists some of the topics to be covered in the business operating agreement:
1. Who are the members of the LLC (that's right, member is the correct terminology)?
2. What did each member contribute to the business?
3. What are the requirements for a new member to join the business and how will the price be determined?
4. What are the requirements if a member wishes to withdraw from the business?
5. What will happen if a member becomes mentally or physically disabled. For what lengths of time?
6. If a member withdraws, how will the buy out price be determined?
7. How will duties be separated and/or shared?
8. How will disputes be resolved?
9. How will profits, losses, and distributions be split among members?
10. What will happen in case of a divorce in a Marital Property State like Wisconsin? Do you have the proper documents and signatures in place so that you do not end up in business with your partner's ex-husband in case of a death or divorce?
These are just the building blocks of an operating agreement. They can be as detailed as you think helpful. As in all things related to business, planning up front saves you a tremendous amount of grief in the end. Agree on the solutions up front and you will save yourselves a lot of heart ache later.
I invite you to share your lessons learned if you went into business without an operating agreement and ended up with problems later on.