If you’re planning to “get hitched” with a business partner, you need a pre-nuptial agreement. For a limited liability company, the document is officially called an Operating Agreement. For a corporation, the relevant document is referred to as a “Shareholders’ Agreement”. For a partnership, the document is called a “Partnership Agreement”. The concepts discussed below apply to all three types of agreements.
What is an Operating Agreement? Under Idaho law (§ 30-6-102(15), Idaho Code), an operating agreement is “the agreement … of all the members of a limited liability company … concerning the matters described in section 30-6-110(1), Idaho Code.” Section 30-6-110(1) simply sets forth what an Operating Agreement typically governs and what provisions of the Idaho Limited Liability Company Act cannot be altered by the terms of an Operating Agreement.
In my practice, I refer to Operating Agreements as pre-nuptial agreements because, going into business with another person (or entity) is a lot like getting married. You know: For better or worse, for richer or poorer, in sickness and in health, until death do you part.
And, just like in marriage, the honeymoon phase in business eventually wears thin and the limits of the “for better or worse” mantra often get tested.
So, then what? The answer to that question is usually a lot less complicated (and less expensive to sort out), if the business partners have anticipated the “what ifs” of their relationship and drafted a roadmap for navigating through them – i.e., an Operating Agreement.
Just as when two people are contemplating entering into the most basic of all partnerships – marriage – there is no better time than before the honeymoon phase wears off to take the time to have a heart-to-heart business discussion about what each owner expects of the other owner(s): (1) at the beginning of the relationship; (2) during the course of the relationship; and (3) at the end of the relationship – whether that point in time is caused by external circumstances or internal strife.
As more than one business owner has learned the hard way, trying to reach a mutual agreement about what’s “fair” is a lot harder at the end of a business relationship when the business partners are not seeing eye-to-eye than at the beginning when they are gazing toward a bright and promising future together.
So, now that we’ve established that you need a written Operating Agreement anytime you get “hitched” to another person as co-owners of a business, what do you need to know before entering into such an agreement? Next week we’ll look at a few Idaho Supreme Court cases for illustration.
Molly O’Leary represents business and telecommunications clients throughout Idaho, and is a managing member of Richardson & O’Leary, PLLC, in Boise (www.richardsonandoleary.com). In addition, Ms. O’Leary serves as a commissioner on the Idaho State Bar Board of Commissioners, and on the statewide advisory council for the Idaho Small Business Development Center. You may follow her on Twitter: @BizCounselor.