Do Not Expect an Internet Operating Agreement To Do The Trick

I come across this issue so often, I have decided that I am going to write about it often with the hope that I can assist some people with avoiding a potentially critical early stage mistake. Every time that I have a discussion with someone who had a bad partnership agreement (this is just a general reference to an agreement among owners and the specific type relates to the type of entity), it is always heartbreaking because by that time, they are in crisis and a review of the document that they were working with usually indicates several areas where they needed the advice of a lawyer.

Do not pull a partnership agreement off the internet or for that matter Legalzoom, read it, and agree with your business partners that ‘it works’ and expect that some issue is not going to come up that you did not think about. With all due respect, you and your partners probably are not business lawyers, and whether you like or trust lawyers or not, there is a reason that we go to school for a long time for this stuff. And just because you are now going into business with your great friend for decades (or someone you really respect, etc.), you cannot assume that everything is going to work out great because you know each other so well.

A well drafted partnership agreement will address legal concepts that will matter in the event of a dispute, but that people who are not professionals simply cannot anticipate. For example, what if this business does well and you decide to sell it, will you be certain about exactly how much equity each partner holds despite the fact that they contributed more money to the entity after the agreement was signed and operations began? Did you write that down and specify whether such contributions would increase equity or be deemed loans? What about periodic distributions to cover tax obligations of partners who have a positive capital account balance, but who do not want to take a distribution? What about management responsibilities? Does everyone get a say in everything? And who owns the company’s logo?

There are many tricky issues that can come up when drafting an agreement among co-owners of a business. If you decide to do this without the assistance of a lawyer, you do it at your own risk, hoping that you did not miss something. It is much better to spend a few dollars early to work with a professional than to feel the extreme pain that can result from bad planning.

We are happy to help if you are facing this issue and you should feel free to give us a call.

This blog post is not intended to consist of legal advice and you should always consult with a lawyer before acting on anything you find on the Internet.  If you have questions or comments about this post, about the topic, or if you need legal assistance, you should feel free to give us a call or send us an email.