Starting a New Business: Drafting Governing Documents

Once business founders decide on the type of business entity to establish (for example, a limited liability company, corporation, partnership, etc.), specific “governing” documents need to be prepared for the new company. In Maryland, a limited liability company must file articles of organization with the Maryland Department of Assessments and Taxation to establish the entity, and in many cases will also wish to have a written Operating Agreement (though Maryland law does not require a written Operating Agreement). Similarly, a new corporation must file Articles of Incorporation to come into existence and must also have corporate Bylaws. Shareholder or “Buy-Sell” Agreements also are sometimes a good idea, especially in closely held corporations.  Partnerships often benefit from having a written Partnership Agreement. For more details on each entity type and their requirements, see my previous article, “Starting a New Business: Deciding the Type of Business Entity to Establish.”

Founders may be tempted to prepare governing documents without legal counsel, using forms or template documents found on the Internet. Despite the time and financial pressure to move quickly and efficiently, the legal issues involved in forming a new entity and putting it on the right path can be more complicated than they first appear. Investing in qualified legal support early on can provide significant benefits by both creating governing documents that protect the interests of all owners or shareholders and establishing a foundation for good governance moving forward. Below are a few things that should be considered for inclusion in most limited liability company operating agreements. These same concepts may apply in a written partnership agreement or in a corporate shareholders’ agreement, as well.

Protecting the Business Owners’ Interests If a Dispute Arises

An Operating Agreement for a limited liability company that has more than a single member should include provisions that safeguard the members’ interests if disputes arise. A poorly drafted “disputes” provision might remain unnoticed until a conflict arises but then cause real difficulty when the members try to determine their legal rights, methods of dispute resolution, and available remedies. For example, a “generic” Operating Agreement template may provide for an equal division of assets among three members upon dissolution if a dispute arises, which is unlikely to be fair or equitable if one of the three members contributed significantly more time and capital to the venture (or under any number of other circumstances). A well thought out and drafted agreement would include a provision for dispute resolution that protects the interests of all members.

Protecting the Company’s Interests If a Dispute Arises

An Operating Agreement can also be tailored to provide flexibility for the company’s growth while minimizing unnecessary risk. At the outset of a business venture, optimism often abounds, which can lead members to give short shrift to clauses that address membership changes. For example, the members might overlook boilerplate provisions regarding restrictions on transferring membership interests, leaving the business vulnerable to unwanted external interference by a third party. Or, if a member decides to exit the company, the remaining members may find it difficult to quickly raise the necessary capital to buy out the departing member’s interest. To prevent this, a carefully drafted agreement can provide a right of first refusal, giving the remaining members the opportunity to buy out the exiting member’s interest before it can be sold to a third party and establish flexible payment terms to purchase the departing member’s interest over time.

Consult a Business Lawyer to Customize Your Governing Documents

Drafting governing documents is one of the most important steps in building and protecting a business. As business lawyers, we assist business owners at every stage of ownership, offering guidance in selecting the best entity, drafting customized governing documents, and providing ongoing business counsel. We can help you navigate legal complexities so you can focus on growing your business.