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The best way to avoid a business divorce.

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Ever heard of a business divorce?

Hint: it’s not pretty.

Here’s how I’ve seen it happen:

Two intelligent, well-meaning friends decide to go into business together. It makes sense – they’re in agreement on the basic business model and will combine cash and resources to build a profitable company.

Everyone has the best intentions of making it work. There is a high level of trust, so everyone moves forward in good faith on a firm handshake.

Flash forward one year.

Owner A has put more money into the business than Owner B. Owner A has taken on the lion’s share of business operations. Owner B has been running personal expenses through the company and shows up once a week.

Owner B is on the business bank account, of course, so he helps himself to 50% of the funds, leaving next to nothing for overhead. He maintains that’s “his share”. Owner A uses what’s remaining in the account to pay the bills.

The relationship becomes contentious. Owner A wants Owner B out. Now what?

Attorneys are hired, complaints are filed in court. Legal fees mount and the relationship disintegrates into dust.

It’s reasonable to think that two friends or family members don’t need to memorialize their partnership with a document – but the truth is, friends and family need an Operating Agreement just as much (if not more) than strangers.

The reason?

If you have a personal relationship already, the Operating Agreement will help you PRESERVE it.

An Operating Agreement is a critical document for an LLC. It helps owners pre-agree on the most important elements of running the business – in advance, when everyone’s getting along.

A good Operating Agreement will answer the following questions:

How much money does each business partner need to contribute over time?

How much of a reserve will we keep for expenses?

How often will we distribute profits? How much time does each owner need to spend in the business?

What if one partner wants to exit – how will we determine the purchase price for a buyout?

Years ago, I decided I wasn’t going to do litigation. I’d seen my share of business divorces and the anguish (and cost) that created for the owners.

Ever since, I’ve worked with business owners on protecting and growing their companies instead. We stay out of the courtroom.

Part of that plan?

Highly-customized Operating Agreements.

Don’t wait until things go sour. If you have a partner, you need an Operating Agreement.

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