Starting a business is exciting, and if you’re about to take the plunge, congratulations! However, many business owners get caught up so fully in the excitement of launching, they neglect important steps in the process. The item most often omitted is arguably the most vital – the Operating or Partnership Agreement. Even though it may seem unimportant at the time (“we’ll put everything in writing later!”), running a business without an Operating Agreement is like driving a car without oil. Sooner, rather than later, the harm will be irreversible.
Here are five things your partnership agreement must include:
1. Delineation of decision making authority. Unless your Operating or Partnership Agreement clearly states who has the power to obligate the company, take loans, or otherwise create debt for your corporation, your partner could run wild and leave you without personal recourse for breach of contract. On the other hand, if your Partnership Agreement dictates that before a member can execute a contract on behalf of the company, both (or all) partners have to consent in writing, then you can legally object to disastrous transactions of which you had no part.
2. Dissolution, Dissociation, or Buyout? No matter how well you and your partner(s) get along, the day will probably come when you simply don’t see eye-to-eye on some aspect of the business. Regarding partnerships, do think you own your business in perpetuity? Think again. Without clearly defined buy-out procedures, under the Florida Revised Uniform Partnership Act, either partner has the ability to force dissolution. Giving yourself the right to continue the business even if your partner wants out can save your company from crumbling.
3. Percentage of ownership. How much is each partner contributing financially? Does your capital contribution equal your share in the corporation? Is one corporation member contributing sweat equity while the other only working capital? Is the latter entitled to return of his initial contribution? Can partners make special contributions or loans to the company? What happens when the entity is undercapitalized? Failure to reach an agreement with your partners before getting into business, and failure to commit those agreements to writing, are the leading causes business litigation lawsuits.
4. Who is entitled to what compensation, and when? Business partners should know which owners and employees are getting paid, how much, and when any compensation begins. Each scenario is case specific, but providing for compensation too early can create unforeseeable problems for the business. These items should be well-researched and agreed to, in writing, prior to day one.
5. The death or incapacitation of a partner. A topic no one likes to discuss, but this section is a must. First, the surviving owner needs protection from becoming partners with an undesirable person, such as a parent, spouse, or even adult child of the incapacitated partner. Second, you want to make sure that in case of disaster, your family’s rights and interests are protected. Finally, both parties want to make sure the business can continue and won’t be forced into dissolution. Specific buyout provisions, including the determination of value of each partner’s share, must be painstakingly outlined in the Company Agreement, in detail.
Of course, this list is not exhaustive. Every business is unique, and consultation with a business lawyer is a step you cannot afford to skip.
Do you have questions about Partnership, Operating or Company Agreements? Give us a call today at (305) 431-5678, or come visit us at 9990 SW 77th Avenue, Miami, Florida 33156.