Advice for Healthy Relationships (In Business)

All is fair in love and war, but what about business? Collaboration can be one of the most thrilling parts of being a creative, but when things go left - it can be messy. There are several ways to structure a collaboration, but a Limited Liability Company (“LLC”) is the most common these days, especially for small businesses, so we’ll focus on LLCs. It is always best to put things in writing when all is well so that if circumstances change, you have a roadmap for what to do. For an LLC, this roadmap is called an Operating Agreement. Here’s a breakdown of the basics of partnerships and key points to keep in mind when working together.

Members
All partners of an LLC are considered Members. Members can have different equity percentages and responsibilities but are all owners of the company. LLCs can either be Member-managed or Manager-managed. In a Member-managed LLC, all Members share in the responsibility of day-to-day operations of the company. In a Manager-managed LLC, one or more appointed Managers, who may or may not be owners of the company, oversee the operations of the business. Other Members maintain their stake in the company but give the Manager decision-making authority for how the LLC operates.

Adding or Removing Members
What happens if your partner no longer wants to be involved? It is important to establish the procedure for adding and removing Members from the jump. It is typically decided by majority vote of the Members. Unanimous consent is also an option, but often leads to deadlock. In some cases, new Members are required to “buy in” and contribute a minimum amount of money, or if providing sweat equity (the unpaid labor contributed by any Member), to complete a trial run for a period of time. Many Operating Agreements include a Right of First Refusal clause, which states that if one of the Members of the LLC wants to sell their share of the business, they must first give the other owners the opportunity to buy their share before they can sell to a third party.

Capital Contributions
Capital contributed is any money that an owner has or will invest in the company. Capital contributions can come in the form of sweat equity, real estate, tangible assets, or cash. You can contribute part sweat equity and part money investment. It is important to keep records of who puts in what, cash or otherwise. In some cases, Members that put in more may be given more equity. In other cases, Members choose to be reimbursed what they put in before the other Members can take money out of the company. The options are endless.

Vesting
Vesting is like the dating period before marriage. A lot of Operating Agreements contain a vesting schedule so that ownership in the company is not realized until certain factors are met. Typically, vesting is tied to providing sweat equity for a certain period of time, or hitting certain sales or performance benchmarks by the Members, or both. This is also helpful for incentivizing employees by giving them the ability to earn equity if they perform. For example, you can offer someone a 20% ownership in the LLC if they stay with the company for 2 years. If they leave after a year, they could either walk away with half (10%) or nothing, depending on what’s decided in the Operating Agreement.

Duties of the Members
What is each Member going to do to deserve their equity? Are Members expected to work full-time? If so, consider adding a non-compete clause to prevent Members from working with other companies in the same industry. In some cases, a Member may contribute Passive Investment. Passive Investment does not require the Member to work for the Company if they contribute capital. Who can sign contracts? Who will sign tax documents? Put everything in writing and keep in mind how much money and time each Member is expected to contribute.

Voting
Voting can be structured in a few ways: Majority (51%, or more), Unanimous (100%), or Supermajority (66%, or more). In some cases, different Members may have different voting rights based on their level of involvement with the company or their capital contribution. For example, some Members have more say in the creative aspects and others have more say in the business decisions. What happens in a deadlock? A certain Member may have the authority to cast the controlling vote if things are tied up. Will you require a vote for transactions over a certain dollar amount? It is crucial to discuss upfront what kinds of decisions require all Members to consent and which can be delegated to certain Members or Managers. All Members are not created equal (if that’s what you decide).

In conclusion, every relationship needs trust, honesty, and communication. When it comes to business, a written agreement lays a solid foundation to build upon these values. It sets forth expectations and how to deal with challenges providing a strong backbone for your company and your partnership’s future.