When
forming a business partnership, it’s important for the parties to protect
themselves with an operating agreement so that issues can be resolved in an
orderly fashion.
This is part 1 of a 2-part series examining operating agreements. In
this post, I’ll begin by looking at two real-world examples that illustrate why
it’s crucial to create and abide by an operating agreement. In part 2, I’ll
discuss some key provisions needed in a standard operating agreement.
The first case involves two people who had a 50-50 arrangement in a
business they co-owned as an S-Corporation. The business was succeeding and
everything was fine between the two sharehholders. However, as the months
passed, one partner was doing far more work than the other. I was representing the active
business partner, who was handling the operational and business
side of things, while the other partner just wanted to collect a check from the
monthly profits.
Understandably, the partner doing all of the work wanted to buy out the
other partner, since she was collecting a check for doing nothing. Because the two didn't have
an agreement, the non-active partner had been hiring accountants and lawyers to
do things that my client didn't agree with. A considerable amount of time was
spent answering his legal questions about what his partner could or couldn’t
do, and what the legal ramifications of dissolving the corporation would be
going forward. Unfortunately, the way they formed their corporation, evenly
dividing everything, required a unanimous decision by both partners on every
matter. Once they became adversarial, the only solution legally was to dissolve
the partnership.
Having had an
operational agreement in place in the beginning could have gone a long way to
avoiding the problems that had arisen. Specifically addressing such important
matters in the decision-making process is something I advise for any
partnership looking to do business.
The alternative to seeking legal counsel in this situation might have
been to hire a life coach or business coach. A lot of times, people seek me out
for legal counsel, but the problems they have aren’t (yet) of the legal nature.
This is a great
solution when people are not getting along and need to find a way to resolve
interpersonal conflicts. In other words, they think they've got a legal problem,
but that’s not necessarily true. These coaches can talk you through
decision-making and how to be happy in your business. Irene Leonard and her business, Coaching for Change, is someone I highly regard
offering this service.
In the second
case I encountered, another client thought ahead about decision-making. He and
his partner drew up an operating agreement where a coin flip would be the
deciding factor for disputed management decisions.
They had been
working together for 15 years, and they were positive that they'd work together
for more. I pointed out that, while
there may not be disagreements at this exact moment, they could arise years
from now. For example, what if one wanted to move the location, but the other
person didn’t? Neither wanted to decide who would have to make these kinds of
decisions, so they entered into an agreement where they would have to flip a
coin and abide by the outcome. The partnership has been working just fine the
last three years, and if any issues arise, they will pick up a coin and toss
it.
No matter what
way a business decides to resolve issues, they should be in writing to protect
all parties. Each business partnership is different, so if you feel you should
have a formal arrangement drawn up, contact us to set up a meeting.
