Practice Areas › Business and Corporate Law
What an Operating Agreement Should Decide
An operating agreement is written while everyone likes each other, and read when they don't. That gap is the whole problem, and it is the reason the document matters more than the entity.
What it is for
It is not paperwork. It is the answer to arguments that have not happened yet.
Forming the entity is administrative. The operating agreement — or the partnership or shareholders' agreement — is where the actual bargain lives: who decides, who gets paid, what happens when someone wants out, and what happens when two owners want opposite things.
Anything the document does not address is decided instead by a default statutory rule. Those defaults exist to fill gaps, not to reflect your deal, and owners are routinely surprised by what they say.
The questions below are not exotic. Every one of them arrives eventually in a business that succeeds, and most of them arrive in a business that struggles.
The one that catches everybody
Splitting profits and paying them out are different questions. Owners routinely agree the percentages and never discuss whether distributions are mandatory or discretionary.
The consequence is specific: a pass-through owner can be taxed on income the company earned and never distributed — a tax bill on money never received. Two sentences in the agreement prevent it.
Templates
The problem is not that a form is badly written.
Most templates are competently drafted. The problem is narrower and harder to see: a template answers the easy questions and stays silent on the hard ones. It has to. It does not know anything about the deal it is being used for.
It cannot know what is unequal about your arrangement
One owner puts in the money, the other puts in the work. One is guaranteeing the lease personally. One expects to draw a salary and one does not. A form assumes symmetry because it has no way to learn otherwise — and symmetry is rarely the actual deal.
It cannot ask the uncomfortable questions
What if you stop getting along. What if one of you stops working. What if a spouse inherits a stake. These are the conversations people avoid at formation, which is precisely why they belong there — the terms are far easier to agree before anyone knows who they will favor.
It cannot see the rest of your situation
A form does not know about the license you hold, the investor you expect next year, or the sale you have in mind in five. Those facts change what the document should say, and they are exactly what counsel exists to elicit.
The honest version
A template is fine right up until the moment it isn't — and nobody finds out which one they have until it matters. The failure is silent for years, and by the time it is visible the terms can no longer be negotiated, because by then the parties know exactly who each clause would help.
The arithmetic
An ounce of prevention, stated plainly.
The case for getting this right is not that lawyers are nice to have. It is that the two costs are not remotely comparable.
Doing it properly
At formation, while everyone is aligned.
Cost
Known in advance, and a fraction of a single month's dispute.
Timing
Weeks, alongside everything else you are doing to start.
Who bears it
Shared, willingly, before anyone has a position to defend.
What you get
A document that says what you all actually agreed, while you can still all remember agreeing it.
Sorting it out later
Once the disagreement has arrived.
Cost
Open-ended. Litigation and arbitration are priced by how long the other side wants to argue.
Timing
Months at best. Meanwhile the business often cannot make decisions at all.
Who bears it
Everyone, unwillingly — including the owners who did nothing wrong.
What you get
A default statutory rule, or a judge's reading of what you probably meant.
This firm sits on both sides of that line — drafting these agreements, and litigating them when they were not drafted well. The second view is what makes the first one useful.
This page is general information, not legal or tax advice. How it applies depends on facts this page cannot know, and the rules change. Reading it creates no attorney-client relationship. Please see our Attorney Advertising, Legal Notices & Disclaimers.
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