You Really Need a Shareholder/Operating Agreement

If you are an owner in a corporation or limited liability company with at least one other person, you should have a shareholder (for corporations)/operating (for LLCs) agreement.

Why do you need one? Do you want to spend thousands of dollars in legal fees if one of the owners wants to get out and sell his/her interest in the business or disagrees with your ideas of how to run the company? Litigation is always more expensive than drawing up an agreement before the fighting starts. The ideal time to draw up a shareholder/operating agreement is before the company is formed. But even if you have been in business for a number of years, it is never too late to put everything in writing in advance of problems occurring.

A basic agreement should include sections about how to distribute profits and losses (this may not be done evenly depending on each owner’s contributions and time spent in the business), how to bring in new owners, how each owner will be allowed to sell his interest in the business, what happens in case of the death of an owner, how to resolve business disagreements, how much of a commitment to the business is required, and what could trigger a dissolution of the business.

It is imperative that you consult a business lawyer who has drafted these types of agreements before to help you with your agreement. You may also need to consult with your accountant and an insurance agent (typically a company buys life insurance to cover the buyout of a deceased owner). In discussing the different points of the agreement, you will discover that your partners may have very different views than you do. If relations are still friendly between you and the other owners, coming to an understanding about how the company will proceed in the future is more likely than if all of the owners are hostile.

A shareholder/operating agreement can be changed after it is drafted and signed but at least it serves as a starting point for how to decide questions that are very likely to arise in the life of a company. Business is like a marriage in some ways but most participants do not expect it to be for life. At some point, you will want to get out. If you do not have a shareholder/operating agreement, you could wind up in court, like a divorce action. And we all know that divorce isn’t pretty or cheap.