When you’re starting out a business, depending on the type of entity that you set up, whether it’s an LLC, a limited partnership, or a corporation, you’re going to need to have an operating manual for your business.
These manuals, depending on the type of entity are called different things. In corporations, they’re called by-laws, in an LLC they’re called operating agreements, and for limited partnerships, they’re called partnership agreements. While they have different names, they all mean basically the same thing – it’s an operating manual that says how your business works, who owns what percentage of the business, how profits and losses are distributed.
Whenever issues arise and you are uncertain of how to proceed, you’ll turn to this operating manual for the next steps. This way, you won’t end up at a loss of what to do next in your business decisions.
When you start out – who is bringing what to the table? If one partner is providing sweat equity but not bringing capital to the table, the other owners have to be okay with that from the beginning. Partners will have to accept that risk going in so that 10 years down the line when you start realizing true profits, owners have to be okay with the fact that partner didn’t contribute any money but will be receiving a percentage of the profits.
An operating agreement, or partnership agreement, will state you either have to agree unanimously or it’s a non-issue. What is also can provide is a buy-out provision. In other words, partner A can say they’re willing to buy out partner B because the partners can’t agree. Partner B has the option either to accept or turn around and say what’s been offered can pay for partner A’s 50% interest.
If one of the owners is going to be running the day-to-day operations, you need to decide beforehand whether this person will receive a salary and how that will be distributed. This lets them know they’ll be receiving compensation in addition to the profits. You need a document in place limiting the transferability of each of the owner’s ownership interests because you want to make sure that you have some control over who you’re working with and where the other ownership interests are going.
If you’re married and own part of a business, then if something were to happen to you – by operation of law – your ownership interests would go to your spouse. If the owners that are left don’t want to be in business with the spouse, they should have something in place stating that the remaining owners, or surviving owners, have the right to buy back those interests from the spouse. This ensures the remaining owners aren’t left in business with someone they did not intend to be in business with.
Business owners need to realize they not only need to be experts in what they do, but they need to learn how to be business owners. It’s a dual track – they need to be an expert in the service or good they provide, but they also need to become an expert at being a business owner.