You started your business to build something. You put in the long hours, made difficult decisions and figured things out along the way. At some point, someone told you that you needed an operating agreement, so you got one. Maybe an attorney prepared it. Maybe you used an online template. You signed it, filed it away and went back to running your business.
But that document may contain the rules governing some of the most important decisions your business will ever face.
For an LLC, it is generally the operating agreement. For a corporation, similar issues may be addressed in a shareholder agreement. Whatever the name, it is worth knowing what your agreement actually says before you need to rely on it.
What happens when something changes? Businesses change. Owners get married or divorced. Partners disagree. Someone wants to retire. An owner becomes incapacitated or dies. A successful business may also become substantially more valuable than it was when the original agreement was signed.
Your agreement should address questions such as: Who owns what percentage? How are profits and losses allocated? Who makes major decisions? Can an owner sell an interest to an outsider? What happens if an owner wants out? And what happens to an ownership interest when someone dies?
If the agreement doesn’t provide clear answers, the owners may discover the problem at exactly the wrong time.
Consider two equal business partners who suddenly disagree about the future of the company. One wants to expand; the other doesn’t. If the agreement requires both owners to approve major decisions but contains no effective way to resolve a deadlock, the business can become stuck.
Or imagine that one owner dies. Does that owner’s spouse or child inherit the business interest? Can the remaining owner purchase it? How is the purchase price determined? Who decides what the business is worth?
These questions are much easier to answer around a conference table than during a crisis.
Many agreements provide for a buyout at “fair market value.” That sounds straightforward until everyone disagrees about what the business is worth.
A stronger agreement can establish a valuation process in advance. It can also address when a buyout is triggered, how it will be funded, whether payments can be made over time and what happens if an owner becomes disabled, retires, divorces or dies.
For business owners, succession planning should also coordinate with personal estate planning. Your trust may say who inherits your property, but your business agreement may restrict what happens to your ownership interest. Those documents need to work together.
An operating or shareholder agreement should not be something signed once and forgotten. As the business grows and circumstances change, the agreement should be reviewed to make sure it still reflects the owners’ intentions. Pull yours out and read it.
Does it clearly explain what happens if an owner dies, becomes incapacitated, wants out, gets divorced or simply cannot agree with the other owners?
Your business agreement isn’t just another document in a file. It’s the rulebook for the business you’ve worked so hard to build and the worst time to discover what it says is when you desperately need it to work.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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