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Operating Agreements

Operating Agreements

  • Operating agreements are one of the most important documents for a business to have, especially if you are two partners that are not related or not married to each other.
  • An operating agreement tells you what’s going to happen in case you decide to part ways. So it’s effectively a prenup for a business.
  • What happens when one owner passes away, when owners have a dispute, or when one owner wants out?

Hey, everyone. It’s Shauna, the Tax Goddess, here with you today to talk about operating agreements. So, I know, I know. Normally, only attorneys get excited about operating agreements, but if you’re in business, you should, too. Operating agreements are one of the most important documents for a business to have, especially if you have two partners that are not related or not married to each other. Because really, the operating agreement tells you what’s going to happen in case of… It’s effectively a prenup for a business.

So one of my favorite examples is, let’s say you’ve got two partners. One of them passes away. How does the other partner get the first partner’s ownership? Or, does he? Or she? Does the person who is still alive, does the shares of the deceased person go to the deceased person’s spouse? What happens to those shares? Often, an example like this is where we’re going to see something like buy-sell insurance. This allow the widow to hand over the shares and the company maintains the ownership, or the single owner that’s now left, retains the ownership. So, these are all considerations.

This is why I call an operating agreement basically a prenup for a business. So, if you’re in business with a partner and you don’t have one of these things, this is the time to have the discussion.  Other cases we’ve seen are where people start a business. Everything is rose-colored glasses. Everything’s fantastic. But, a couple of years in, now the two partners are fighting and they don’t have an operating agreement to settle  the dispute. So, really, as you’re thinking through this operating agreement with your partners, make sure you’re thinking about all of those what if scenarios. 

What if somebody dies? What if somebody gets upset? What if somebody just wants to leave the partnership, they don’t want to be in it anymore? What is the value of those shares, if somebody’s trying to get out? Is it a formula based on gross revenue? What is that value? So, if you’ve any questions on operating agreements, we’ve seen, literally, thousands of these things. Obviously, we don’t write them. We’re not attorneys, but we can definitely get you to a business attorney. You’re going to want to talk to like a corporate attorney.

They can help you write these things and write them well, and well enough for what you need for your business. So, definitely, one of the things that I, Tax Goddess, always want to see on all of our clients is an operating agreement. It really is, literally, that important. So, I hope you guys are having an amazing day and I look forward to seeing you guys next week. All right. Bye.

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