Why a Partnership or Operating Agreement Matters Before a Dispute Starts

Most business-partner disputes do not begin with a lawsuit. They begin with an unanswered question: who gets to decide?

When owners are getting along, it is easy to leave important issues informal. The problem is that disagreements usually arise precisely when the parties no longer agree on what the arrangement was supposed to be. A well-drafted partnership agreement or operating agreement gives the business a set of rules before that happens.

Put the ownership arrangement in writing

The agreement should identify who owns what, what each owner is expected to contribute, and how profits, losses, and distributions will be handled. If one owner contributes money and another contributes labor, relationships, intellectual property, or management time, the written agreement should reflect that structure.

Decide how decisions will be made

Many disputes become expensive because the owners never established voting rules. The agreement should address which decisions can be made by a majority, which require unanimous approval, who manages day-to-day operations, and what happens if the owners reach a deadlock.

Plan for departures before anyone wants out

A good agreement should anticipate resignation, retirement, disability, death, termination of an owner's employment, or a decision to sell. Buyout provisions can address valuation, payment terms, rights of first refusal, and whether an owner can transfer an interest to a third party.

Address competition, customers, and company information

Depending on the business, the agreement may also address confidential information, intellectual property, customer relationships, outside business activities, and restrictive covenants. These provisions should be tailored to the company and the applicable law rather than added as boilerplate.

A written agreement does not prevent every dispute

No agreement eliminates the possibility of a falling out. It does, however, reduce the number of issues that have to be reconstructed from emails, text messages, tax records, and competing recollections after the relationship has deteriorated.

For new businesses, the better time to address these questions is when the owners still agree. For existing businesses operating without a meaningful agreement, it is usually better to fix the gap before a disagreement forces the issue.

Whitelock & Associates, P.A. assists businesses and business owners with operating agreements, partnership agreements, ownership disputes, and related commercial matters. Call 954-463-2001 or visit whitelocklaw.com to discuss the company's structure or a developing dispute.

This article provides general information and is not legal advice. Reading it or contacting the firm does not, by itself, create an attorney-client relationship.