Thursday, September 27, 2012

What To Think About As A Sweat Equity Partner

I have found an operating agreement is an absolute necessity for small enterprises, particularly LLC's with multiple members and similar partnerships.

The % of ownership can be determined by a financial contribution, or a donation of effort in the form of hours at zero cost to the company, carefully accounted at an agreed upon rate and yielding a resulting ownership share, or some other means of valuing an investment in the firm.

Yet a third factor to consider in specifying the ownership % is the long term role of each partner in the operation of the firm.

An operating agreement is a separate document, not controlled or required by the state or the federal government but very important to your company. It should be a simple, straightforward document you and your prospective partner(s) can draft yourselves, addressing such matters as % of ownership, how revenue will be distributed and other general matters, as well as who can commit the company in the form of credit cards, who signs checks on the company account and other administrative matters. Buying out a partner should also be covered as well as adding new members if the need arises down the road.

I have seen many enterprises fail or go through terrifically hard times due to lack of an operating agreement. The parties should sign it after a review by a lawyer. It should then be notarized and made an official part of the company file.

You can download a free, generic operating agreement with instructions from the second vertical Box Net cube in the left margin of the below site. You can feel free to borrow from the sample or supplement it as you see fit to make it your own. It is fairly comprehensive in order to cover most business situations and there may be elements of the example you feel are not necessary.

The role of the individual in the on-going operation of the company is a major factor to consider in the ownership equation as well as initial financial or labor contributions. The operating agreement process is the way to achieve equity and commitment among the parties.
Courtesy Of Kenneth Larson, SCORE Mentor