Tag: what is an operating agreement

  • Ask the Hard Questions Before Starting a Business

    dock at dusk by Scott Ellis from Flickr
    dock at dusk by Scott Ellis from Flickr

    When business owners are launching their new venture, they can get so excited about launching the business that they don’t put the energy into making sure they have the structure of their business relationship laid out. Why would they want to do that? That sounds really boring and kind of a downer when you think about it.

    Even though it might seem boring or superfluous, people who are going into business need to have a meeting of the minds and address some of the hard questions that come with owning a business. It might be the first stressful conversation you have to have and it’s a good way to gauge how well your partner(s) communicate under stress. You might learn that they’re an irrational nutball when things aren’t smooth sailing and you don’t want to go into business with them.

    When I’m working with new business owners, here are some of the questions I throw at them to see how well they’ve thought through their plans.

    • When and how much will each owner get paid?
    • What happens if an owner gets divorced? Becomes disabled? Dies?
    • What are each person’s responsibilities? How much can each owner spend without getting the other owner(s) approval?
    • If the owners are deadlocked on a decision, how will you resolve it?
    • What should happen if an owner isn’t performing up to par?
    • What will happen if an owner wants out?
    • Under what circumstances can an owner kick another owner out of the company? What will the process be?
    • What’s the goal of the business, including the exit strategy?

    Ideally, these answers should be a part of the owners’ operating agreement if they have an LLC or otherwise documented in a master plan so everyone’s on the same page. Business divorces can be as messy as family divorces, especially when the owners didn’t figure some of these things out in advance.

    It’s much easier to deal with these questions when everyone’s happy and thinking about what’s fair and what’s best for the business than to wait until everyone’s pissed off at each other and looking for ways to get ahead or screw over the other owner(s).

    Before you start a new business, talk about the hard questions with your potential partners before you launch your venture and consider meeting with a business mentor and/or a business attorney to make sure that you’re setting yourselves up to be a success from all angles from the beginning.

    You can connect with me on Twitter, Google+, Facebook, YouTube, LinkedIn, or you can email me.
    You can also subscribe to the Carter Law Firm newsletter.
    Please visit my homepage for more information about Carter Law Firm.

  • How to Avoid Screaming Matches in Coffee Shops

    Office Cleaning Prank Played On Janitor In Frederick Md from Flickr
    Office Cleaning Prank Played On Janitor In Frederick Md from Flickr

    When you and a friend have a great idea for a new business, you create an LLC.

    When you create an LLC, you get super-excited about your new venture.

    When you get super-excited about your new venture, you forget to put in the business infrastructure behind the scenes.

    When you forget to put in the business infrastructure behind the scenes, you and your partner may have different ideas about how you’re going to run the business.

    When you and your partner have different ideas about how you’re going to run the business, you get frustrated with each other.

    When you get frustrated with each other, you get into screaming matches at coffee shops.

    Don’t get into screaming matches at coffee shops.

    Get an operating agreement at the beginning of your business relationship.
    This will make sure that everyone is on the same page and you can predetermine how you’re going to address certain problems before they arise.

    You can connect with me on TwitterGoogle+FacebookYouTubeLinkedIn, or you can email me.
    You can also subscribe to the Carter Law Firm newsletter.
    Please visit my homepage for more information about Carter Law Firm.

  • Why You Need an Operating Agreement

    Sailor race cardboard boat in base competition by Official U.S. Navy Imagery

    If you have an LLC and your company has more than one owner, you need an operating agreement. Period.

    An operating agreement is a contract between the owners of a business that tells them how they’re going to run their business. Think of it as the owners’ rule book and prenuptial agreement. It puts everyone on the same page from the beginning in terms of what each person owns, what each person is responsible for, and how you’re going to resolve problems.

    Your operating agreement can answer important questions like:

    • If an owner wants out, how much notice does he have to give? Do the other owners have first dibs on buying his portion of the company?
    • Do owners ever have to contribute their own money to the business?
    • What do you do if an owner isn’t pulling her weight? Can she be voted out of the company?
    • How will disputes be settled? If there’s an even number of owners with equal votes on each side, what’s the tie-breaker?
    • What happens if an owner dies?

    Don’t think that you don’t have to create an operating agreement if you’re going into business with your best friend, spouse, or relative. We all know someone who has gone through a nasty divorce. The same can happen in the break up of a business if there isn’t an operating agreement that tells you how events will proceed.

    It may seem strange to think about how you’ll handle problems at the beginning of the business, but it’s the ideal time to put these provisions into place. Hopefully everyone is optimistic and thinking about the business’ best interests which will make it easier to decide the best way to handle major decisions down the road. If you put off figuring out how you’ll resolve disputes until one occurs, you’ll be fighting over how the company should resolve its problems and you’ll be fighting over the problem at hand.

    Operating agreements aren’t just about resolving problems. They give you the ability to create the company you want. Some companies may decide disputes in mediation, but you can choose to settle problems with a coin flip, a game of ping pong, or let your dog decide if that’s what you and the other owners want. You can also use your operating agreement to declare other rules like requiring everyone to bring pie to work on March 14th (Pi Day) and allowing video games as an acceptable brainstorming technique.

    You’re not required to have an operating agreement if your LLC is in Arizona, but you’re asking for trouble if you don’t. This is one of those times when it’s worth it to pay a lawyer. You will pay a lot less to have someone draft the agreement for you, than to clean up the mess that could result when you and the other owners have a major dispute and everything goes to hell.