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FORMING A BUSINESS WITH A PARTNER? Why bylaws, operating & partnership agreements are crucial

The idea of owning one’s own business may sound like a dream in light of our country’s work culture, which demands complete and total devotion to one’s employer. Starting a business, however, comes with many unexpected costs, not just monetary, but in time, effort and willpower. For this reason, the idea of spreading the costs among partners, founders or members is quite appetizing and lucrative. As with everything that will affect one’s future, however, proper planning is critical to personal and business wellbeing. Although preparing governing documents (the terms used to describe bylaws, operating agreements or partnership agreements, generally) for your business is not required in all instances in New Jersey, having everyone agree to follow the same procedures and principles from the outset of business formation can save much headache as well as heartache in the future.

I recently learned of a New Jersey business relationship that went sour a mere three years after forming. The members (the business was formed as a limited liability company) had formed the business by themselves, filing the formation documents directly with the State of New Jersey without professional assistance. Neither of the members was familiar with New Jersey business laws and did not prepare an operating agreement, believing that their initial agreement to certain aspects of running the business would not change. Initially, one member took on more of the responsibility for day-to-day operations and outreach while the other two continued to work at their “day job” while things were still growing. The members agreed to split liabilities and profits equally but had not confirmed how the roles of each member would change as the business grew and whether such a change would affect profit distribution. Disputes about how to move the business forward continued to grow and caused a strain on their friendship as well as the business itself. In the end, the members had a messy business breakup and were forced to dissolve.

Having had an operating agreement that was prepared by a professional would have saved these members significant stress. An operating agreement details how business profits and expenses are to be divided, how decisions for future changes are to be made and designates certain members are being the decision makers for the business. A well-prepared operating agreement leaves little to question when disputes arise between members. The decision to go into business with one or more partners can be a lucrative and mutually beneficial, however, safeguards should always be put in place to protect everyone’s interests in the future.

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