Category: Business Law

An operating agreement is a document that describes how single or multiple members of a limited liability company will direct and manage a business.  The operating agreement protects the business’ limited liability status by preventing a court from “piercing the corporate veil” or looking past the limited liability category and holding its members personally liable for business debts.  Also, the operating agreement indicates to others that your business is legitimate, and it contains a legal document that most companies have.  Additionally, the document may come in handy when a business owner wants to obtain financing from a lender or buys land.  An investor might request to see an operating agreement before he agrees to put money into a business.  Both accountants and lawyers may want to review the document for accounting and legal purposes as well.

Many business owners draft their operating agreements soon after they file the certificate of formation to start their companies.  However, some business owners put off getting an operating agreement, and tell themselves that they will get one later, and that day never comes.  

Although a business owner can obtain an operating agreement at any time, the worst time to get one is when there is a problem.   Issues can arise when a single member limited liability company is sued, and the opposing party’s attorney argues that the business is illegitimate, and its assets can be seized.  If the business presents an operating agreement to the court, it may find that the company is legitimate, and protected by its limited liability status. 

In the case of a multi member limited liability company, an operating agreement can help minimize disputes.  They usually give detailed explanations of how the members or manager should run the company so that there are no misunderstandings on who does what and how.  When there are disagreements, the operating agreement should explain how the members or managers handle them.

There are many topics covered in an operating agreement, such as, general information about the members, ownership rights, taxation issues, voting and dissolution matters.  This is not an exhaustive list; these are just some of the issues contained in the legal document.  If you don’t have an operating agreement, then you really need one.  Please contact me if you would like me to draft yours.

When two or more people intend to do business together for a profit, they form a partnership. They agree to build and nurture a company.  Although they have a desire to grow a successful business together, there may be bumps along the road.  Many partners face challenges running their company when they don’t have a crystal clear vision as to how it will function.  A partnership agreement helps the partners establish an understanding of each person’s roles and responsibilities.  Here is a list of five important items that a partnership agreement should contain:

1. Contributions

The partnership agreement should clearly and concisely list what each partner will contribute to the business.  It should contain the amount of money, time and effort, equipment, or other resources given to the business.   Also, the partnership agreement should provide the percentage of ownership interest each party has.  

2. Distributions

The partnership agreement should indicate how the partners will divide the profit from the business.  The partners should decide whether the distributions are in relation to each party’s ownership interest.  Also, the partnership agreement should explain whether the partners will take a salary.  If they decide to take one, they should determine when they should get paid, and how much they should receive.

3. Partnership Management

The partnership agreement should explain the roles and responsibilities of each partner.  It should identify who will perform certain key tasks, such as, marketing, sales, paying bills, supervising employees, etc. When each partner understands his roles in the beginning, it helps the business operate more efficiently.  Also, when each party knows his responsibilities, it may help alleviate confusion later down the road.

4. Dispute Resolution

The partnership agreement should address how disputes between partners are handled.  It’s hard to imagine that there won’t be any disagreements between parties.  Most times partners can resolve disputes, and then move on to the next issue.  Occasionally, the parties will not see eye to eye.  Thus, the partnership agreement should discuss how the partners should come to a resolution. 

5. Dissolution

The partnership agreement should provide the necessary steps for terminating the business, and indicate if all partners must consent to the dissolution. 

In conclusion, a partnership agreement helps all of the partners have an understanding of their roles and responsibilities.  Although there are many items to include in the partnership agreement, some of the important ones are contributions, distributions, partnership management, dispute resolution and dissolution. 

In my last article, I discussed the basics of a contract, which consists of an offer, acceptance and consideration. In this piece, I will examine some other important components found in a contract.

Modifications

A modification is any change in whole or part to the terms of the contract. Many agreements explain how alterations can be made.  If you sign a contract, and it explains that you have to make changes in writing, the other party doesn’t have to honor your modification request via a phone call.

Unless otherwise noted, modifications can be made at any time, but all parties must agree to them.  Additionally, consideration is needed for a change, but in a sales contract, it’s not required. 

 Waivers

A waiver or a release is an agreement to voluntarily relinquish the right to take legal action.  Waivers need to be part of a legally enforceable contract.  They are useful when there is the potential for risks. For example, a seller may insist that its buyer waives its right to fees for delivering goods late.  A company may ask its customer to forgo his right to pursue legal action if he is harmed on its premises; thus, waivers can limit the amount of claims filed against a party.

Warranties

A warranty is a promise that something is true.  An assurance that a product will do what it’s intended to do.  Warranties can be expressed or implied. There are several implied warranties, such as, the Warranty of Merchantability, the Warranty of Fitness for Particular Purpose, the Warranty of Free and Clear Title, and the Warranty Against Infringement.

Warranties can be disclaimed when the seller informs the buyer that he will not be responsible for any promises made about the good.  The Warranties of Merchantability, Fitness for a Particular Purpose, and Infringement can be disclaimed by using words like, “as is”.  The Warranty of Free and Clear Title can be disclaimed when the buyer has reason to know by the seller’s specific language or actions that the seller doesn’t have good title, and he’s only conveying as much as he has.

Warranties should be part of the contractual agreement, not in a separate document.  In most cases, the disclaimer must be in crystal clear writing, and conspicuously located in the contract.

Conclusion

Modifications, waivers and warranties are some important elements often found in a contract.

Imagine that you just opened your own business.  In walks your very first customer.  You offer him your product, and he accepts.  And just like that, you entered into your very first contract, a legal agreement between two or more parties.  In this article I will discuss the basics of a general contract. 

The Offer

There is so much to learn about the makeup of an agreement, but to keep it simple, I will discuss the bare essentials.  First, the parties, known as the offeror and offeree, must mutually agree to enter into a contract.  The offeror, who initiates the proposition, needs to provide an offer with definite or material terms, such as the name of the parties, price, service or quantity of goods and duration of the contract.  However, there are times when a court will provide reasonable terms to an agreement when they are absent.

The Acceptance

The offeror must communicate the offer to the offeree, as it can only be accepted by the party to whom it’s made.  Depending on the type of contract, the offeree accepts the offer by agreeing to it or showing his acceptance through his actions.  If the offeror prescribes a specific way to accept the proposition, then an offeree must act accordingly if he wishes to enter into an agreement.

The Consideration

In addition to an offer and acceptance, a contract must have consideration for validity.  There is no agreement without it.  Consideration is the bargain for exchange of something of value.  It doesn’t have to be money; promises, property, services or almost anything else will suffice.  The value of consideration can be big or small, as long as it has been bargained for. 

Conclusion

As a business owner you enter into contracts on a regular basis.  Although agreements are sometimes complex, the basics of a contract are an offer, acceptance and consideration.

An operating agreement is a document that describes how single or multiple members of a limited liability company will direct and manage a business.  The operating agreement protects the business’ limited liability status by preventing a court from “piercing the corporate veil” or looking past the limited liability category, and holding its members personally liable for business debts.  Also, the operating agreement indicates to others that your business is legitimate, and it contains a legal document that most companies have.  Additionally, the document may come in handy when a business owner wants to obtain financing from a lender or buys land.  An investor might request to see an operating agreement before he agrees to put money into a business.  Both accountants and lawyers may want to review the document for accounting and legal purposes as well.

Many business owners draft their operating agreements soon after they file the certificate of formation to start their companies.  However, some business owners put off getting an operating agreement, and tell themselves that they will get one later, and that day never comes.  

Although a business owner can obtain an operating agreement at any time, the worst time to get one is when there is a problem.   Issues can arise when a single member limited liability company is sued, and the opposing party’s attorney argues that the business is illegitimate, and its assets can be seized.  If the business presents an operating agreement to the court, it may find that the company is legitimate, and protected by its limited liability status. 

In the case of a multi member limited liability company, an operating agreement can help minimize disputes.  They usually give detailed explanations of how the members or manager should run the company so that there are no misunderstandings on who does what and how.  When there are disagreements, the operating agreement should explain how the members or managers handle them.

There are many topics covered in an operating agreement, such as, general information about the members, ownership rights, taxation issues, voting and dissolution matters.  This is not an exhaustive list, these are just some of the issues contained in the legal document.  If you don’t have an operating agreement, then you really need one.  Please contact me if you would like me to draft yours.