You Don’t Want to Go Into Business with Your Business Partner’s Spouse! And Other Reasons Why You Need an Operating Agreement
Written by Megan M-P., OLN Freelance Attorney
Nothing pleases me more than a client who walks through my doors with a great idea for a new business. The excitement and energy are palpable and the horizon is clear and bright. The first issue I usually like to address is what type of entity to form. Most new businesses opt to form a limited liability company (“LLC”). This provides the members of the LLC with liability protection, but also offers the alluring tax shelters of a corporation.
Many times a client will say something like, “I just need you to help me with any filings with the state and I can do the rest.” In other words, they just want my help with the Articles of Organization. The truth is that they actually don’t need my help with the Articles of Organization. In Arizona, the forms and related instructions can be found on the Arizona Corporation Commission’s website. They are fairly straight-forward and clear; something that each individual business person can handle. What clients really need my help with is all of the documents after the filing – the Operating Agreement, in the case of an LLC.
Do you want to go into business with your partner’s spouse?
This is the follow up question I ask my clients when they insist that they don’t need an Operating Agreement. And, other than a few suspicious responses, the answer is a resounding “no.” This is obviously not meant as a slight to your business partner’s spouse. I’m sure that he or she is very accomplished and capable. The problem is that you did not actively choose him or her as a partner. However, if you do not have an Operating Agreement, this may be the case.
Arizona is a community property state. This means that any property that is acquired during the marriage is considered the property of both spouses (this includes businesses). Therefore, after a divorce, both spouses each have equal rights to the business. So, although your business partner has lost a spouse, you both have gained a new partner. This can even happen at the death of a business partner. Your partner’s portion of the business may be inherited by the spouse or even the children.
Fortunately, Operating Agreements are designed to address this issue, and many more like it. Operating Agreements help to define each person’s role in the new company, how payments should be made, who makes the decisions, what happens if one of the partners is incapacitated or dies, and other issues that may seem far-fetched when you’re forming your business. This is where an attorney is truly valuable. Your attorney will be able to draft an Operating Agreement that addresses your specific situation. Additionally, your attorney has seen the horrors that business owners have had to deal with and will be able to draft an agreement that attempts to avoid you making the same mistakes.
Regardless of the entity you form, an agreement between the business partners is essential to the health of the business, as well as your own health.