Last week we talked about Barry and Tom, two best friends who started a business together. Once they came to see us for legal advice, we encouraged them to memorialize their agreement in a formal Operating Agreement. Why?
The agreement that Barry and Tom have signed lays out the ground rules for their business. It states the percentage interest that each member holds, how profits and losses will be allocated to those members, how the business will be managed and what authority the members have.
For example, in this case, we limited the investment that one of the members could make on their own with company funds, to $5,000. Barry wanted to know that Tom couldn’t unilaterally agree to an expensive marketing campaign, or other investment, without his input. Tom wasn’t so worried about investments but was worried the Barry would invite his brother-in-law to become a partner without Tom’s okay. So there is a provision requiring that a majority of the members approve any additional partners.
A formal partnership agreement is a must-have for every business and should be customized for the owners’ unique situation and concerns.