Internet operating agreement – does it suffice?
I come across this issue so often, I have decided that I am going to write about it often with the hope that I can assist some people with avoiding a potentially critical early stage mistake. Oftentimes when I have a discussion with someone who had a bad partnership agreement (this is just a general reference to an agreement among owners and the specific type relates to the type of entity), I feel badly because by that time, they are in crisis and a review of the document that they were working with usually indicates several areas where they needed good legal advice.
A smart business person would not simply find a partnership agreement on the internet, modify it themselves, and expect that unaddressed potential issues will not arise.
A well drafted partnership agreement will address legal concepts that will matter in the event of a dispute, but that people who are not professionals simply cannot anticipate. For example, what if your business is a success and you decide to sell it, will you be certain about exactly how much equity each partner holds despite the fact that they contributed more money to the entity after the agreement was signed and operations began? Did you write that down and specify whether such contributions would increase equity or be deemed loans? What about periodic distributions to cover tax obligations of partners who have a positive capital account balance, but who do not want to take a distribution? What about management responsibilities? Does everyone get a say in everything? And who owns the company’s logo?
There are many tricky issues that can come up when drafting an agreement among co-owners of a business. If you decide to do this without the assistance of a lawyer, you do it at your own risk, hoping that you did not miss something. It is much better to spend a few dollars early to work with a professional than to feel the pain that can result from bad planning.