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Formulate a Management Agreement to Avoid Disputes

On Behalf of | Mar 5, 2021 | Business Formation And Planning, Partnership Agreements And Disputes |

Anyone entering into a business relationship in Texas should know that it is a lot like a marriage in many ways.  Unless your business is a single-member entity (i.e., there is only ONE person involved), you will find it necessary to work closely with other individuals within your company when making vital business decisions.  Often, the other party or parties will disagree with your take on the situation, at least in part, leading to major disagreements regarding those business decisions. Planning for disputes before they occur by creating a Management Agreement (also called an “Operating Agreement” or “Company Agreement”) can save you a great deal of time, energy, and money in the event of future disagreements between the members and managers of your business which cannot be resolved within the company and must go to court to have a judge make the business decisions for you.

Business Structure is Key

You should determine how to handle disputes and disagreements among the company’s members and/or managers before starting your business by creating an Agreement to govern both simple and complex business operations.  The exact type of Agreement may be different for different business structures.  For example, a Management Agreement for a limited liability company (LLC) will necessarily be different than an Agreement for a Partnership or a Corporation.  Therefore, it is crucial for you to decide on the optimal structure for your business before you start it, and you should consult with an attorney and your tax professionals to help guide you in this important, threshold decision.

Prepare a Management Agreement

The best way to avoid business disputes in the future is to create an Agreement before or concurrently with the creation of your business.  However, a Management or other Agreement can be created and executed at any point in the business’s life, so if you did not create one when you started your business, it’s never too late! The Agreement should stipulate the terms and conditions of the management of or membership in the business; organize various aspects of your business operation; designate emergency provisions; and determine and state any contributions of capital or other property of each member or manager and their proportionate ownership stake in the business.  While there are some Agreement “forms” or “templates” online or at office supply stores, you should still work with an attorney and your tax professionals to tailor your Agreement to your partiuclar business.  Each business is unique and should not be reduced to a “form” Agreement.  Defining each individual’s roles, rights, and responsibilities ahead of time will go a long way toward resolving disputes and avoiding extremely costly litigation, mediation, or arbitration later.

Let’s face it: no business owners see eye to eye on everything. However, thinking about how you will navigate those instances where there are or will be disagreements between members and/or managers of the company and reducing it to writing in advance of any dispute can definitely help keep your business relationships intact and your business on the right track.