Business partnerships are prone to challenges, which contribute to why they have a higher risk of dissolving when compared to other business structures, ranging from sole proprietorships to corporations. The Journal of Financial Economics published a study that stated more than 50% of business partnerships ended within the first four years. Another National Bureau of Economic Research study found that upwards of 70% dissolve within five years. We pride ourselves in being the team you can turn to when you need a voice in the wake of a dispute. It means even more to us to help you prevent these issues from surfacing. Though there will be times when you must rely on a business law attorney, we don’t want you to have to commit resources to resolve an issue that could have been avoided.
Breaking Down Partnerships
Though the title is a double entendre, it is essential to understand why many of these deteriorate. Ironically, it is the reason how many partnerships form: through friendships. People select partners based on shared values and visions for how a business can be successful—and they are people you trust. The two elements that friends overlook when forming a business partnership is that the latter is a drastically different relationship. Second, they fail to delineate and define their roles, responsibilities, and expectations because of how well they know one another.
The strength of the relationship gets challenged when it comes to questions regarding profit distribution, a chain of command, dispute-resolution procedures, and even exit strategies should either partner decide to leave. One of the easiest ways to build a foundation is by establishing an operating agreement early in your business’s life cycle. In addition to the elements we just mentioned, they set a formal governance structure. Without one, there is no framework for managing your business. With it, you have the systems and procedures to make decisions or execute plans based on previously agreed-upon procedures.
Other Key Elements of an Operating Agreement
Money strains any relationship, but an operating agreement addresses how profits will be allocated, establishing who made the initial capital contributions and how much ownership each partner possesses. This speaks to the ownership interests and the equity stake of each partner. Having a firm understanding of the rights of each partner is paramount for mitigating the potential for future disputes.
There is also a level of safety in operating agreements regarding exit strategies. For example, consider two people who own a company equally. After the significant dispute, one partner sells their stake in the company to a competitor. Though it is a basic example, it demonstrates the need for a plan articulating how the business can be sold and how ownership rights can be transferred. The scenario we mentioned with the partner selling to a competitor could have been avoided if there was a right of first refusal. While we address selling a business, operating agreements also give you credibility with external stakeholders, investors, and lenders. If you ever solicit investors, they will likely ask to look at how the partnership is structured regarding everything we have discussed.
Build an Operating Agreement with Beckemeier LeMoineThe business law attorneys of Beckemeier LeMoine will guide you through the legal components of starting a business while ensuring you are legally compliant. In addition to operating agreements, our versatile lawyers can assist you with operational practices, expansion, dissolving your business, and litigation. Contact our office to schedule a consultation with one of our business law attorneys.