Two founders are aligned on the vision for a business plan and excited to see what the future has in store. They might shake hands, divide the workload, and start building…without putting the business terms into writing. Even though things might feel good in the beginning, there’s always a potential risk of doing business together without having an operating agreement in place.
Even if you feel like you know and trust your business partner, it’s important to consult with a business attorney for operating agreement support. Not only is it good business practice to have the paperwork in place, but the operating agreement is legally required in some states. This agreement protects everyone involved and outlines what happens with big decisions or if a partner wants out of the business.
What an Operating Agreement Actually Does for Your Business
Here are some of the things that are often included in a business operating agreement:
Ownership percentages are documented, so it’s clear how much of the business each partner holds.
Capital contributions are often included to show the amounts that partners put into the business (in the beginning and additional contributions).
The split that will happen between partners regarding business profits and losses.
Ultimately, having an LLC operating agreement vs. a verbal agreement ensures that everything is documented and nothing is left to memory or assumption. Even with the best of intentions, it’s important to understand that “we trust each other” isn’t legal protection. Too often, trust doesn’t hold up when there is a disagreement about money, roles, or how a partner is going to exit the company.
What a Handshake Deal Leaves Unprotected
The issue with a handshake or word-of-mouth deal is that there is no documentation about ownership percentages or any agreed processes for managing major decisions. It’s far too common for business owners to have disagreements about how the business is managed, which can lead to bigger disputes when there isn’t a predetermined process for managing these issues.
Other life logistics can also cause complications if there is no operating agreement in place. For example, if a partner dies, goes through a divorce, is incapable of working, or wants to leave the business, then the operating agreement needs to outline how the situation will be handled.
Default State Rules Apply If There Is No Operating Agreement
Without an operating agreement in place, most of the time the disagreement will default to state rules. In the majority of states, the default is usually equal ownership splits, regardless of the amount of time or money that the partners contributed.
Sometimes, unanimous consent requirements result in a deadlocked business. Then, the dispute ends up in court, and the judge must apply the generic default rules in the situation. But these default rules don’t often align with what the partners intended in the beginning.
So, instead of risking the business decisions to be made by state default rules, a better solution is to consult with a business attorney for an operating agreement write-up in the beginning.
A Properly Drafted Operating Agreement: What Should Be Covered
Every business is unique, which is why it’s ideal to have a business attorney involved in the drafting of the operating agreement. These legal services will ensure that the terms of the agreement align with the partners’ preferences and goals. Here are some of the things that are often included in a business operating agreement:
Ownership percentages
Capital contributions
Profit and loss allocation
Voting thresholds for major decisions
Buy-sell provisions (with a clear valuation method)
What happens on death, divorce, bankruptcy, or withdrawal
Dispute resolution process (mediation or arbitration before litigation)
These terms can help partners work through anything that comes up in the business, which will hopefully break the deadlock and prevent the business from shutting down.
When to Bring in an Operating Agreement Lawyer
Is it really necessary to pay the legal costs and bring in an operating agreement lawyer? Yes, because a proactive approach will prevent you from expensive fees for a business partnership dispute attorney in the future.
The best time to bring in an operating agreement lawyer is before any money or property changes hands. It’s smart to have this agreement in place as soon as possible. Don’t wait for a dispute to start before you start looking at legal advice and agreement documentation.
An experienced attorney will help by asking the questions that business partners rarely think to bring up. There are many potential scenarios that could occur, and these legal services can be critical for protecting both the business entity and the individuals involved.
It can also be helpful to consult with a business attorney if you already have an existing agreement in place, but it is incomplete, outdated, or just a template that you downloaded online. Instead of writing the full agreement from scratch, an attorney can work with what you already have.
Finally, there are times when it makes sense to bring in a business partnership dispute attorney if there is already a disagreement. Legal services can be critical, regardless of whether there is a written agreement in place.
FAQs
Do I need an operating agreement in my state?
The requirements vary by state. Some states have legal requirements that every LLC must have an operating agreement. But even if it isn’t legally required, it’s still a smart decision to draft an operating agreement, especially since both courts and lenders usually expect to see one.
What happens if my LLC doesn’t have an operating agreement?
If a dispute happens and you don’t have an operating agreement, then it means that your state rules will take over. Typically, the ruling is that there are equal ownership splits, and the decision-making rules might not necessarily align with what the partners agreed to in the beginning.
Can I write my own operating agreement without a lawyer?
Downloading a template online or using AI to draft an operating agreement could leave you exposed. You need customized legal services to cover all of the bases and ensure that all relevant provisions are included in case a dispute happens.
Starting a Business with a Partner? Bhojani Law is Here to Help with Your Operating Agreement
Regardless of the number of partners involved in the business, always have an operating agreement in place at the beginning. Even single-member LLCs need operating agreements because this documentation helps with separating personal assets and also shows lenders and courts how the company is structured.
The beginning of a business is always the best time to draft an operating agreement. If you need help, then reach out to our team at Bhojani Law. We’ll ensure that the agreement protects everyone who is involved.