Individuals looking to join with others to form a business may choose from various forms of business structures. Regardless of which structure the individuals choose to form, a governing agreement should be negotiated, and carefully reviewed and executed by all of the involved individuals as soon as the business is formed.

The governing agreement may be called an operating agreement, a company agreement, or a partnership agreement, depending on the state of formation and whether the business entity is a corporation, a limited liability company, or a form of partnership. The agreement governs, among other topics, the ownership, management, and transfer of the business entity’s equity interests. It is extremely important that each involved individual obtain their own legal counsel to review the agreement. Although the concepts that are to be captured in the agreement may seem straightforward when orally negotiated, the manner in which they are documented will likely be complicated and will require a close reading by someone familiar with reviewing legal documents.

As a recent example, a well-educated professional presented a draft of a partnership agreement that he and his partners (one of whom was an attorney who did not practice corporate law) had negotiated and drafted using a form found on the Internet. The individual wisely opted to obtain another attorney’s review of the agreement and found that many of the concepts that were to be included in the agreement were either not included or were set forth in a manner that did not provide for the correct mechanism of how the action was to take place.

Once the agreement has been finalized and signed by the appropriate parties, it is important to revise and maintain it as necessary. For example, if the agreement includes an exhibit that sets forth how the interests in the business are owned, the exhibit should be revised accordingly whenever there is a transfer of interests or an individual leaves or is added to the business (whether as an owner or a partner). Doing so maintains the appropriate paper trail necessary to document a company’s current ownership and management structure.

Most business ventures start out between friends or individuals who are on good terms, but as time passes and the risks and rewards of the business evolve, many of these relationships turn adversarial. Having a well-negotiated governing agreement in place helps to alleviate any misunderstandings as to how the business is to be run or how profits and losses are to be allocated. The regulations set forth in the governing agreement should be adhered to and any documentation required under the agreement (for example, stock certificates, meeting minutes, board resolutions, etc.) should be maintained in a minute book in the company’s principal office or with the appropriately designated officer of the company.

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