Yes, You Need an Operating Agreement. No, the One You Downloaded Isn’t Sufficient.

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The fun of being an entrepreneur is developing your winning idea for the new product or service you want to offer. The last thing people want to do is stop their creative process and deal with the paperwork.

But making sure your business-house is in order before launching your big idea is CRITICAL to your long-term success. It is worth the investment to do it right.

So what do you need to do before launching your business, especially when you have a partner? GET AN OPERATING AGREEMENT.

Many people opt not to have a pre-nup before getting married, but in business, you NEED one.

You are literally wrapping your livelihood into this venture, so you want to be protected.

Consider this your opportunity for “pre-partnership counseling.” Creating an operating agreement allows you the opportunity to discuss your expectations on the front end, set out the parameters of your partnership, and put procedures in place for if things go wrong.

“Can’t I just download a standard one for a couple hundred bucks off the internet?”

Your business is unique, and your operating agreement should be too! You should always include standard items such as: clearly stating ownership percentages; initial capital investment amounts; procedures for future contributions and their impact (if any) on ownership percentages; procedures for future distributions to partners; procedures for dissolution and winding up of the business operations. But there will also be considerations specific to your business.

You also need to consider what happens when you have a disagreement.

No matter how happy you are at first, the honeymoon phase will end and you will disagree. And this is what is most frequently left out of operating agreements and most often causes distress for businesses. You need to decide up front—What happens if there is a tie when you vote on something? What happens if your partner stops doing their job? What happens if one of you wants out? If you do not contractually agree on the answer to these types of questions, then the law in your state will govern. In South Carolina, there is no such thing as a “quickie business divorce” outside of your contract. That means you have to seek judicial dissolution by filing a lawsuit and going through the arduous legal process, which not only costs you money (that could better be spent investing in your business) but also demands your time and attention.

Bottom line: invest the extra money up front to do it right. Get the business pre-nup.

(P.S. And hire a thorough accountant ASAP to make sure your records comply with your required procedures! Like in marriage, money is the number one cause of fights in business, so outsource that to the experts.)

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