Why You REALLY Need an Operating Agreement

I’m super serious this time.

Lately I’ve heard from a number of business owners whose partners have stopped contributing to the business, financially or otherwise, and the business owner calling me simply wants out.  Of course, it’s rarely simple.

A few callers are lucky in that the company has not yet transacted any business and therefore no
equity really exists in the business to worry about leaving behind.  However, most callers find themselves in a position where they have contributed a disproportionate amount of blood, sweat, and tears to the growth of the business while their partners have done little to nothing.  Many callers report that their partners have not only done nothing but have even sabotaged the business by alienating customers, entering into lopsided contracts, or making large purchases without permission from the other owners.

I wrote about why it’s important to have an owner’s agreement (an operating agreement for an LLC or a shareholder agreement for a corporation) and the reasons cited above underscore the importance of those types of documents.  In Nevada, without such an agreement, your options are much like they’d be in a divorce: 1) work it out yourselves, 2) duke it out in court, or 3) judicial dissolution, which is a fancy term for letting the court wind down your company.  Options 2 and 3 are of course wildly expensive and can take years to resolve, crippling the business and preventing the owners from moving on to more promising pursuits.  The best way to facilitate option 1 is to have a written agreement among the owners that dictates how disagreements will be handled.  A buy/sell agreement can also dictate not only what happens when a partner dies, but how a partner can get out of the business.  It will outline how the partner’s share of the company is calculated and what the remaining partners can do to buy out that partner’s interest.  In the absence of these types of agreements, business owners find themselves trapped.

Business partnerships are just like marriages.  Even though when you get together you don’t ever think you’re going to split up, the sad statistics say otherwise.  Protect your interests and your sanity by implementing the business version of a pre-nuptial agreement – an operating agreement or shareholder agreement.