We love representing clients who are starting up new businesses! Some parts of starting up are fun: coming up with a name and logo; refining the product offering; planning the awesome expansion that will happen once everyone realizes how awesome your business is. And there are some things that aren't so fun. Writing an operating agreement, for example.
An operating agreement (or partnership agreement or bylaws) is the legal document that defines each person's rights and responsibilities, as well as provisions for general management and running the company, both day-to-day and in the event that someone dies or the company dissolves. (Now you know why people avoid this part.) It's one of the most important things you can do before you start investing time and money in any business venture.
There are a few provisions that every operating agreement should include:
1. DECISION MAKING. Talk about and decide how you will make decisions, especially in those cases when it's an important topic and there is no consensus.
2. CAPITAL CONTRIBUTIONS. This is the section where you say how much money each person is putting in to start the business. You should also address what will happen if that initial investment is not enough to carry you through to profit. What will happen if the business needs more money? Will you close your doors? Seek outside investment or have the owners put in more money themselves? It is always good to plan for worst case scenario ahead of time. Also, if one partner is the "money" partner and another is a workhorse, it is good to make this clear on paper so that everyone understands what they are getting into.
3. SALARIES/DISTRIBUTIONS. These are technically two different sections, but they are getting at the same thing. Start with basic questions like: When will the partners be able to take money out of the business? If one of the partners wants to build a national brand, this may require keeping the money in the company longer (and thus fewer distributions) than if the other partner wants to make it a mom and pop shop and live on the small salary. Will partners ever get re-paid for the investments they put in, if so, when? You and your partners should be in agreement about the ways the money should be allocated among the owners.
4. DEATH/DISABILITY. It seems so unlikely, but bad things happen sometimes, and it's best to be prepared. Insurance, Trusts, and Wills all come into play on this topic, so you'll have to think through who in your life you trust to make decisions on your behalf; who would inherit your shares of the company; and would you want your beneficiaries to have a say in what happens to the company (or, conversely, are you prepared to share power with your partner's spouse/family member/friend.)
5. DISSOLUTION. No one ever wants to talk about this one, but it is extremely important to discuss at the beginning of the business relationship. Figure out now, while everyone is getting along, what will happen if one of the partners doesn't want to be involved anymore. Think ahead to a time when you and your partner(s) may not be in agreement about the business. That is not the time to start arguing about the exit strategies. The time to figure out exit strategies is at the beginning when everyone is working to make the business take shape.
If you're starting up a new business, either alone or with partners, and you have questions about the legal formalities and preparing an operating agreement, give us a call at 253.858.5434. We proudly serve clients throughout Washington and Idaho and are available to meet in person, by phone, or via Skype or FaceTime.