Operating Agreements Should Pre-Solve Problems


After the big mess, the partners all agreed that forming an LLC right should be a priority.

They got together and formed Wishful Contracting LLC.

They just went online and found an inexpensive, easy way to do it. Boom. LLC. Finally they were protected.

Mike, Olivia, Carl and Fred felt they had smartened up. They were doing it right at last, and now they had a real business.

Time passed, and Fred became more and more of a problem. He made mistakes often enough that Carl started to visit Fred’s worksites to make sure the work was done right. Hardly a month went by without a problem being discovered.

It turned out the Fred was having a problem with controlled substances. Fred wasn’t the least bit interested in going into rehab, so the other partners decided it was time to remove him. Fred was not the least bit interested in being removed.

That’s when Mike, Olivia and Carl found something out: They couldn’t remove Fred.

LLC Member Disassociation

Fred didn’t want to removed. Changing membership in an LLC required the consent of all members. Since Fred would not sign a document removing himself, they were stuck.

If the LLC had $100,000 profit, Fred would still be entitled to a quarter share. If the other partners tried to play with the books to lock him out, Fred could sue them.

It seemed that Fred had talked to someone.

The Operating Agreement

Some of these problems are easily solved with a good operating agreement that is read, understood and signed by all parties.

Operating agreements should try to anticipate most ordinary problems. One problem with friends and family in business together is that often assume they will continue to get along. They may also take offense at any suggestion that an operating agreement seems to anticipate so many potential problems. Some people take that as an accusation.

Some people respond to operating agreements a lot like some people respond to a marital prenup. It feels like distrust. It feels like someone is trying to protect himself against us because they think we will turn against him.

Operating Agreements are meant to preserve the peace by pre-solving problems and providing straight-forward methods to other problems.

Any company that lasts long enough will run into problems. A lot of problems might be solved easily enough without the need for the terms of the Operating Agreement. But things can change. Stuff happens.

Be a Scout: Be prepared. It’s the only smart move.