The internet abounds with countless instances in which business arrangements have come to an end as the result of disagreements, particularly when friends or family members are both owners of a business, whether it is a partnership, a limited liability company, or a corporation. Even when all parties have the best intentions, owning and/or managing a business with a friend or family member can become unexpectedly complicated and lead to disagreements that can be exceedingly difficult to resolve without the proper framework in place.
For instance, let’s say you start an LLC with a close friend in which you both own 50% of the company and agree to split distributions 50/50 because each of you plan to work an equal number of hours on behalf of the business. Due to unforeseen circumstances, your friend only performs minimal work for the business and decides that he has no interest in working any additional hours in the foreseeable future but still asserts his entitlement to his share of the distributions, which you both agreed, in writing or verbally, to split 50/50. Given your friend’s reduced hours commitment, you may feel unsatisfied and seek a change, which could put a strain on the non-business side of your relationship.
All of the potential stress and damage to the friendship caused by the above scenario can be solved in large part by executing an operating agreement that directly ties how much time and effort each person contributes to working in the business to the distribution allocation. A well-conceived operating agreement will also address each owner’s responsibilities, how much capital each person contributes, what happens when an owner leaves the business or dies, and what happens if the business needs additional capital, among other factors.