Part I: How an Operating Agreement Could Save your Business
Your business relationships are built on expectations and your most important business relationship would be your business partner. However, that relationship will crumble if your expectations are not clearly defined. So what is the best way to lay out your expectations? Contracts.
‘Contracts’ may not seem like the sexiest business term, but when you start a business, an agreement between your partners (or ‘members’ for LLC or ‘shareholders’ for a corporation depending on your choice of entity) can save your business. You and your partners must completely review your expectations of one another before you start your business. If your company was a bucket, you won’t start seeing the problems until it starts filling with water! So be sure to review these expectations before investing or generating a great deal of time/money, otherwise you’ll lose a lot of water.
You and business partners you in a relationship, so basic rules to relationship apply. This is not to say anything about anyone’s love life, but you must clearly communicate what you expect from your partners and what you believe they should expect from you. This means being honest and upfront about everything.
Just like divorce, most problems between business partners occur because of failure to meet expectations or bad communication or due to financial strain (which may include lack of money, how to spend money, or even too much money). This may be further complicated if your partner is also a personal friend or relative; see my article on the 3 Types of Partnerships to Beware!. The best way to describe your expectations, how you communicate, and how you make financial decisions is through your agreement between your partners. The three most important parts to this agreement are: (1) control; (2) compensation; and (3) ownership. Read Part II: 3 Concerns Every Operating Agreement Should Address for more details!