Do Family Businesses Need an Operating Agreement?
Provided by HG.org
The need for an operations agreement in business arrangements is crucial to ensure transactions are able to continue even when disagreements and conflict arise. A family business is run with loved ones, and this may cloud judgment, so an operations agreement should be included in the necessary documentation to avoid future problems.
Family businesses are run by and with those that generally love each other. When emotions are involved in business arrangements, it is possible these situations may become volatile. Even though spouses, parents and children and similar circumstances may bolster relationships, disagreements are inevitable. Because of this, it is important to have paperwork that has been created to ensure the business survives these ordeals and transactions may continue despite any conflict between loved ones. This means that an operations agreement is imperative for the company. If the family business resides in a state where a deadlocked argument causes a dissolution of the organization, the operations agreement file becomes the saving grace.
If the company is a larger business such as a corporation, an operations agreement is usually necessary. There are many others to consider such as shareholders, directors, employees and management. The operations agreement explains certain details for arguments, responsibilities for partners or owners, shares and the percentage of interest in the company and various other important details. Without an operations agreementís terms, the death of a majority shareholder, co-owner or partner could result in difficulties. There are usually specifics about dividing interest, stock or shares and how these are sold in a reasonable manner. If no conditions exist for these situations, someone that could topple the business may buy the shares or stock.
Why an Operations Agreement is Important
Operations agreement documents are vital pieces of paper within a company that has more than one person that owns or manages it. For partners, co-owners and majority shareholders, this assists with ending arguments, continuing business transactions when these persons are unable to and helping to sell shares or interest in the company after a partner or owner dies or leaves. When these persons are family members, emotions often cloud judgment and arguments could become the end of the entity. With the operations agreement, there may be an outlined and structured process. This may bypass any complications in product manufacture or service distribution.
One vital piece of business in an operations agreement is the process of disseminating stock, shares or interest when a partner or owner dies or cannot continue within the company. The fair market value of the stock or interest is often provided to the person leaving. If he or she dies, the others are provided an opportunity of purchasing these at a reasonable price so that the remaining interest is distributed. However, other processes may exist such as a buyout, passing the shares to another person, including a spouse in the arrangement and an heir inheriting the interest. When these persons are family, the stock or shares may be passed on without the need to purchase them.
Family Complications in Business
The primary reason an operations agreement is necessary for most companies is due to arguments and conflict that arise from certain decisions. Even companies run and managed by family members is subject to verbal fights and sparring between each other. If these persons are partners or co-owners, this could lead to a deadlock that may result in the dissolution of the company in the states where this occurs. However, even without this threat, deadlocks could cause business transactions to halt and revenue to stop. This is devastating to the company and any employees that work for the family. The eventual ruination of the business or family relationships may arise through these arguments.
The operations agreement may have contingencies in place to handle a deadlock. This would provide a means to end any arguments or ensure that business transactions still continue until a decision has been made about the product, service or continued processes. Some decisions may affect marketing, advertising, manufacturing or distribution. When detailed in the operations agreement, conflict could be avoided and relationships saved with family members. A proactive solution within the document often leads to better resolution for the decision deadlock.
Family Business Lawyer Assistance
To ensure an operations agreement is valid and the clauses are enforceable, a business lawyer should be hired for assistance. The terms may need to be edited or added to an existing document within the company to provide for future conflict and potential deadlocked decisions.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.