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Starting a business is like falling in love- no, it IS falling in love. We love the idea and mentally feel the same as falling in love with another person. And, starting a business with another person is like getting married. The difference is there is no sex to keep the relationship going. And, just like many people getting married prepare prenuptial agreements, your business relationship needs governing documents.
The first place to start is with the end. What will happen when your partner leaves or has lost interest in the idea? Whether you call it an operating or shareholder’s agreement is immaterial, cover the question of who owns the entity in case of a partner’s exit. Describe in detail if the interest of the other is to be “bought out” and how that should be determined.
Which brings up the next most important question- who has the deciding vote. Trust me when I say, a 50/50 partnership is fine, but joint decisions don’t work long term. Think of your own marriage (or divorce, as the case may be). If you have a 50/50 partnership, you must have outside advisors (Board of Directors?) who can insure that a decision is made, instead of a stalemate. [By the way, EVERY enterprise needs an outside board, one that can examine operations and directions from without.]
The next issue is one that may or may not be part of your operating agreement, but will help the rest of the cogs fall into place. Discuss (even if you think you already know it all) both of your priorities- children, family, other interests. What about family illness, maternity/paternity leaves, leaves of absence and the like? This can then be addressed with a one or two page addendum (call it “Manager Policies”)- it’s a document that can be referenced when such issues arise (years later?); it will either serve to solve problems, or make it clear whether one or another needs to leave- permanently or temporarily.
As you would expect, this now sets the stage for determining what your corporate structure will entail- a partnership, a limited liability entity (LLC), or a corporation. Partnerships split revenue and losses based upon percentage ownership. An LLC allocates profits and losses at will each year (you will need a document or section in your operating or shareholder’s agreement to govern how you will make such decisions). Corporations either don’t allocate profits or distribute same via dividends (you will also need a document or a section in your operating or shareholder’s agreement to govern how you will make such decisions).
Once the concepts are defined, have a legal and financial advisors help you formalize the document. Don’t forget to define who will comprise your board of advisors (or directors), as well.
Cerebrations: Roy A. Ackerman 