Business Divorce: Treat Your Operating/Partnership Agreement Like a Prenup

Take my word for it: Business divorces can be worse that marriage divorces.

I have NEVER handled a divorce case (and neither do I have the desire to handle one). One of the reasons is the sheer exhaustion it would take to handle a divorce between a married couple because of the emotions, money, children and other matters at stake. But over the years of handling business disputes, I have come to realize that business divorces are as contentious, if not more, than traditional marriage divorces. And like the often talked about prenups that are a part of some marriages, a business prenup is essential to protecting assets and making sure all parties have an understanding of what happens IF..which typically means WHEN…something goes wrong with the business venture.

Business Terminology Lesson 101: “What’s in a name”?.

So some basic terminology before I elaborate on the need for a business “prenup”. If you are in business with someone other than yourself and have not filed paperwork with the Secretary of State (because it’s not required for general partnerships) or have filed with the Secretary of State as a limited liability partnership or limited partnership,  the business entity is called a “partnership”, with each of the business owners being a “partner”. This applies even if your business partner is your spouse. If you have filed paperwork with the Secretary of State to become a limited liability company (LLC), then you have a “limited liability company”, each of the business owners being a “Member” and NOT a “partner”, which has a different legal meaning. If you have filed as a corporation of any kind with the Secretary of State, you have a “corporation”, the owners of which are called “shareholders” and a Board of Directions. The document that will be considered the business prenup for the partnership is called a “partnership agreement”, for the limited liability company is an “operating agreement” and for the corporation is a “shareholder agreement/by laws”. For purposes of this blog, I shall call them “prenup documents” to refer to either of these items. These documents are not filed with the Georgia Secretary of State but represent the details of the business arrangement between the owners.

“What’s Love Got To Do With It?”- By Tina Turner, the Queen.

So, as Tina Turner sung, “What’s Love Got To Do With It”? You want to go into business with a person because you are in love with a business idea. Fine. But be smart and don’t let emotions get the best of you that you don’t protect your interests—because love can be highly overrated when things go sour. I tell people that not getting a prenup (in marriage or business) is like driving a car without a seatbelt—no one wants or expects to get into an accident but you cannot control the other people. Protect yourself now or regret it later—it’s that simple.

Things to Consider Adding to Your Business Prenup *Not an exclusive list:

  1. Termination: What happens when the business dissolves (assets including property and money, “winding up activities” such as paying creditors, staff, settling accounts, notifying clients), if the business is not dissolving but a portion being sold, are there “Rights of First Refusal” to other business owners, what is the method and process for doing a fair business valuation, is there a Buy-Sell Agreement attached to this prenup (THERE SHOULD BE!)
  2. Rights: What accounting rights is each owner afforded? How are voting shares distributed and maintained, if any, to prevent dissolution by adding new owners? Is a super majority needed for major decisions? How are disputes resolved internally? Are rights evenly distributed among owners or do certain owners have heightened rights because of their particular position?
  3. Capital: Is the default percentage of ownership equal to the percentage of profits? Is the default percentage of initial contributed capital equal to the amount of ownership? What about “sweat equity” and how is that calculated? How is capital distributed—when and what method? Are there “stock options” that will be included or in place of distributing capital?

*This is an incomplete list of items included in business prenups but gives you questions to think about OR even better—for your attorney to think about.

So before you “walk down the aisle” with your “business love”, make sure that you pause and clear your head to think logically about the “what ifs” that could go wrong with your business relationship (or any for that matter.) It’s best to involve your legal counsel into this transaction as soon as possible so that everything can be taken care of and you can start your business marriage on the right foot and knowing your rights have been protected.

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