Have you ever been divorced or know someone who has? We all look back and say “There should have been a pre-nup!” With a business, the divorces are worse – nastier, more intense, and more expensive. Why? In your marriage you can choose to have a separate bank account with your spouse; you can choose to have a different career, you can choose to eat a different meal; and some people even choose to sleep in different beds. Well, not in business.
In business, you and your partner(s) have access the same bank account. The level of trust that you share is intimate. You spend more time with your business partner(s) than you do with your spouse and running a business is not an easy task. In business, the partners must agree. If they don’t, then divorce is inevitable. You need a pre-nup, which is called an Operating Agreement (OA) in the business world. (See http://www.businessweek.com/smallbiz/content/sep2009/sb20090925_379753.htm)
Just like with pre-nups, you are more likely to agree on things in the beginning of the relationship. An OA is a legally binding document, created at the beginning of your business relationship, which clearly defines the rules of your partnership, including its demise. An OA usually includes:
- Organization — addresses your Ws – What kind of business is it; What does it do; Where is it located;
- Management – how is it managed: Do all partners have the same powers or does each have a different responsibility?
- Contributions to Capital – who contributes how much start-up money and the process for adding to that capital;
- Capital Allocations and Distribution – how and when both the profits and the losses are shared. This is especially important if one of the partners contributes services and the other cash;
- Transfer of Membership Interests – the process for gaining new members, what happens when a member retires, and a provision for expulsion of a member.
- Voting, Quorum, and Meetings — who is allowed to vote and how much weight each member’s vote has; how many members constitute a quorum for an official meeting.
- Fiscal Affairs Records – who, what, when, where, and how any and all fiscal records are kept.
- Termination and Dissolution — let’s define the divorce proceedings, shall we?
If you are thinking about starting a business with someone else or already have a functioning business but need to get all your ducks in a row, contact a reputable business attorney in your area. Unlike marriage, a business “pre-nup” can also be a “post-nup,” and it is never too late to get one while partners get along!