Your Partnership Could Float or Sink Your Business: Why Businesses with Multiple Owners Need Operating Agreements to Flourish

Connecting with friends, family, or business associates is a great way to break into business. It allows you to put shared resources towards a common shared vision. But what many entrepreneurs and small business owners don’t know is just how much extra protection is needed when partnering with anyone – and I want to underscore anyone.

At the start of your venture, when everything is just a concept, you and your partners are supercharged with energy, optimism, and vision. Fueled by an amazing idea and big plans, you and your partners are eager to pout your available resources into your new business. If this were a marriage, which in many ways it will be, this could be called the “honeymoon phase”. Everything’s all good for now.

And just like in any marriage, there will be lumps and bumps along the way. The goal is to make sure your business is set up to survive and grow along the journey. If you’ve decided to start a business with someone, you will need an agreement that outlines the nature of each owner’s rights, role and responsibilities. The legal entity you’ve chosen for your business determines which agreement you will need.

If your business is structured as a partnership, you will need a partnership agreement. If your business is structured as an LLC, you will need an operating agreement. The agreements accomplish the same objectives, so we’ll refer to operating agreements for now.

An operating agreement outlines how the business will be managed and makes it clear how decisions should be made under various circumstances. This helps to minimize disputes between co-owners, as the agreement controls major situations from beginning to end.

Most small business can’t survive a long stint in court. Because of this your legal strategy should be designed to keep you out of court and get you in and out as quickly (and as cheap) as possible if your business is ever at the center of a dispute that turns into a lawsuit.

It’s also important that your operating agreement discuss things like who has the authority to legally bind your company. This means they’ll have the legal authority to take on debt and liability for which your business will be responsible.

Here’s something else to be aware and wary of, Bosses: if you don’t have an operating (or partnership) agreement in place, your state law kicks in to decide how all of this stuff plays out. In that situation, two facts apply: 1) you have lost control over your business; and 2) it’s going to be expensive to try and get that control back.

The best defense is a strong offense and partnership/operating agreements are designed to keep your business on track even when people and things go left.

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