30 Jun The Importance of a Well-Drafted Operating Agreement, Partnership Agreement or Shareholders Agreement
The Importance of a Well-Drafted Operating Agreement, Partnership Agreement or Shareholders Agreement
by Michael A. Burger, Esq.
Corporate and Business Planning Attorney with NC Planning
Whether a business is in start-up mode or has been operating for some time, keeping track of and maintaining corporate formalities can be a challenging process. However, it is an important one. As business lawyers, one of the questions we get asked the most involves whether it is necessary to have an owner’s agreement (i.e. operating agreement, partnership agreement or shareholders’ agreement) in place. The answer is a resounding YES! Without limiting the benefits of such an agreement, here are a few examples of why this is important to make sure this agreement is in place.
First of all, a well-drafted operating agreement, or the like, should clearly define ownership structure and managerial authority. This will be important to determine who and how decisions can be made on behalf of the company. This is an opportunity for the owners to decide, among other things, who can bind the company, set spending/borrowing limits and how profits are to be distributed.
Secondly, the operating agreement will help to serve as a piece of the corporate formality puzzle necessary to maintain the integrity of the limited liability shield created by the corporate entity. A company that is formed but that operates without the appropriate corporate governance documents in place is likely exposing itself to risk of potentially having the corporate veil pierced in the event of an accident or some other liability event. The best practice is for the company to work with good, reliable corporate counsel to ensure that proper corporate documentation is being prepared, reviewed and maintained on a regular basis.
Thirdly, the agreement may (and in most instances should) contain certain “Buy-Sell” provisions. Buy-Sell provisions are typically triggered in the event of death, disability, divorce or dissolution/insolvency of a company owner. The Buy-Sell agreement will set forth the steps on how the purchase/repurchase of a company owner’s ownership interest is effectuated in the event that one of these life-altering moments occurs. Even if one of these events never happens, it is sound planning to have this structure thought through and prepared by a business attorney so as to be protected and provide peace of mind that these items of “disaster planning” have been appropriately addressed.
Finally, in the event that there is a voting deadlock or an irreparable divide amongst the company owners, the operating, shareholder or partnership agreement should contain language on how to resolve a deadlock in voting and how to properly structure an exit from the company. These are not necessarily pleasant or exciting things to think about when entering into a partnership or corporate ownership structure, but they are important to resolve at the outset so as to avoid potentially larger problems down the road.