Five Things Every Operating Agreement Should Have
In our experience as business attorneys, we know all too well that things can and do go very wrong if partners in a business don’t have an operating agreement. While there are many more than 5 reasons you should have an operating agreement if you have even one other partner, here’s five things you simply must have.
All operating agreements should establish what vote is required to act. This is an effective way to manage authority. The operating agreement should require unanimous consent of any unit holder or shareholder to do certain things and a majority vote for others. It’s important to carefully craft the right voting structure so the business can run efficiently but ensure decisions are made with the requisite agreement amongst the owners.
What happens to your business if one of the partner’s passes away? Will they be able to transfer their shares or will the remaining partners have to approve the transfer. Every operating agreement should include some language governing what will happen upon the death of a partner. One rule of thumb is to build in a clause that ensures there is not a deadlock when only two partners remain. This could happen if one partner holds 50% and the other holds the remaining 50%. Once they disagree on something, the business can’t continue and in serious disagreements, can require judicial dissolution.
Certain Restrictions on Partners
You need to make sure there are restrictions built into the operating agreement that would stop one partner from doing something that could hurt the others. One example of this is selling shares. Your operating agreement should make unanimous consent of the partners a requirement in order to sell or transfer shares. Another smart restriction is to limit the amount of money any partner can spend on the business to a set amount. If the business is going to spend more than that amount, it will require a majority or unanimous vote.
Conflict Resolution Procedures
No one goes into business intending to have conflict with their partners. Despite the best of intentions, conflicts do arise just like with any other team interaction. The important part is having an agreement on how conflicts will be resolved if they do come up. The main points to include in dispute resolution provisions would be what State’s law will govern the contract and what procedure (such as arbitration) will be required. We recommend arbitration since it usually allows for some confidentiality if and when a dispute arises and can be significantly less expensive than litigation.
Let’s say you can’t work out your disagreements with your partners or you’ve otherwise agreed it’s time to walk away. Your operating agreement should establish what’s going to happen once that decision is made. This language can include an agreement as to what will happen to the business and certain property owned by the business. It may also address whether the partners can compete or start new business. A detailed description of what the partners agree should happen if the business is closed can avoid costly and bitter disputes. It is easy for things to become very contentious when a business has come to an end and without an agreement up front as to what should happen, these disputes can escalate into full blown lawsuits (and result in substantial costs).
Contact A Business Attorney to Discuss Your Operating Agreement
There’s certainly quite a few more important clauses you should include in your operating agreement but it often depends on the type of business you are in and the unique relationship between the partners. If you’d like to find out more and have a business lawyer from our team provide more narrowly tailored insight based on your business, give us a cal today at 419-469-5002.