There are some parts of starting up your own business that can be fun: coming up with a name and logo; refining the product offering; and, planning the amazing expansion that will happen once everyone realizes how great your business is.
And there are some things that are not really very much fun at all: Writing an Operating Agreement, for example. The purpose of a partnership agreement is to prevent disputes by determining the rights, responsibilities and powers of each partner. The agreement anticipates certain situations and their impact on management of the business; and, determines in advance what measures will be taken in the event they occur. If a partner dies or wishes to sell his shares, or if there is a disagreement between two partners, you will know how to settle the matter quickly.
What is a partnership agreement?
A partnership agreement establishes such things as:
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- the rights and obligations of each partner, particularly regarding finances;
- the tasks allocated to the partners;
- the measures applicable in the event of a partner’s departure or death;
- the measures applicable in the event of bankruptcy;
- and includes all relevant information concerning management of the business, such as the composition of the board of directors and the purchase and sale of shares.
Some important clauses:
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- Decision-Making. Talk about and decide how you will make decisions, especially in those cases when it is an important topic and there is no consensus.
- Capital Contribution. This is the section where you say how much money each person is putting in to start the business. You should also address what will happen if that initial influx of money is not enough to carry you through to profit. What will happen if the business needs more money? Will you close your doors? Seek outside investment or have the owners put in more money themselves? It is always good to plan for worst case scenarios ahead of time. Also, if one partner is the “money” partner and another is a “workhorse”, it is good to make this clear on paper so that everyone understands what they are getting into.
- Salaries/Distributions. When will the partners be able to take money out of the business? If one of the partners wants to build a national brand, this may require keeping the money in the company longer (and thus fewer distributions) than if the other partner wants to make it a mom and pop shop and live on the small salary. Will partners ever get re-paid for the investments they put in, and if so, when? You and your partners should be in agreement about the ways the money should be allocated among the owners.
- Death/Disability. It seems so unlikely, but bad things happen sometimes, and it is best to be prepared. Insurance, trusts, and wills all come into play on this topic, so you will have to think through who in your life you trust to make decisions on your behalf; who would inherit your shares of the company; and, would you want your beneficiaries to have a say in what happens to the company (or, conversely, are you prepared to share power with your partner’s spouse/family member/friend)?
- Dissolution. No one ever wants to talk about this one. But it is extremely important to discuss this at the beginning of the business relationship. Figure out now, while everyone is getting along, what will happen if one of the partners does not want to be involved anymore. Think ahead to a time when you and your partner(s) may not be in agreement about the business. That is not the time to start arguing about the exit strategies. The time to figure out exit strategies is at the beginning when everyone is working to make the business take shape.
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If you have any questions or need assistance in drafting an Operating Agreement for your business, please feel free to contact JV LAW GROUP. As is the case for any other type of contract, it is vitally important that you consult an Attorney to draw up an agreement that meets your needs.
