As I write this, there is a highly publicized fallout occurring between the co-founders of a cookware startup.
Great Jones, co-founded by childhood friends Sierra Tishgart and Maddy Moelis in 2018, was poised to become the next rising star in kitchen cookware staples. However, an explosive article on Business Insider reveals that tensions between the two reached a boiling point during the pandemic. By September 2020, the company’s six employees collectively resigned amid allegations of mismanagement and mistreatment. (A Great Jones representative has disputed parts of the Insider story and the company maintains an active Instagram presence.)
The Great Jones situation is a stark reminder that a business partnership can steer a startup toward a meteoric rise but also cause an implosion, if not handled properly.
That’s why all business partners, no matter how well they’re currently getting along, should have a written agreement in place. A written agreement may not be able to fully act as a startup safety net. But what it can do, however, is outline rules that help entrepreneurs successfully, and smoothly, run their businesses.
What’s a Written Agreement?
A written agreement goes by a few different names depending on the entity you incorporate your business as. Those that form a partnership will draft a written partnership agreement. If you form a limited liability company (LLC), you will write up an LLC operating agreement. Corporate bylaws are drafted for those that decide to incorporate as a corporation.
The purpose of a written agreement is to establish how the business is run by its owners or members, in the case of an LLC. A written agreement is a transparent, straightforward document. It outlines the roles and responsibilities of each owner in the business and carefully details the company’s internal management structure.
What Goes in a Written Agreement?
There are specific sections that each written agreement needs to cover. There may be more details to include or fewer, depending on the legal structure you form for the business. But make sure you include the following six clauses as you begin drafting your written agreement.
The term is the organization’s official start date. This includes the day, month and year that the company is officially in business. Typically, there is no end date included. However, some written agreements may outline a termination date depending on the entity formation.
2. Roles and Responsibilities
Each owner details the role they play in the business and where they are held accountable. This section also notes their daily responsibilities.
It may seem like a basic area to cover, but it’s important to clearly understand who does what in the company. This helps to resolve any conflicts or disputes among owners and better understand how much of a say each person has in making business decisions.
This section takes a closer look at who owns what in the business. Typically, each owner, member and/or partner will contribute a specific amount of capital to the company. The full amount they contribute is part of their ownership.
Additionally, this section details how and when the owners are paid, profit and loss terms for each partner, and information about the business bank account where the money is kept.
What are the rules if a business owner would like to admit a new owner, or partner, into the business?
A written agreement should be able to outline how new members may join the business. Additional information concerning their roles, responsibilities, capital contributions and anything else they may receive upon joining the organization should also be noted in this section. If you do not plan to admit new partners or members, please make note of that decision.
5. Voluntary/Involuntary Withdrawal
What happens if a member or owner wants to leave the business? Perhaps their leave is voluntary, or perhaps it is involuntary. In either event, a clause must be drafted that outlines the terms for the withdrawal process.
Business dissolution may be reviewed as early as the voluntary/involuntary withdrawal process. If an owner is leaving the business, whether of their own accord or not, it is possible that the business may dissolve with its state of incorporation. A business may also dissolve if the owner passes away or simply because it has run its course.
It’s always in the best interests of business owners to be prepared for anything. Use this section to outline terms for dissolution. Detail how the remaining assets of the entity are to be divided among its owners, partners or members in the aftermath. You may also note whether former owners may start or run businesses based off the idea of the dissolved entity.
Do I really need a written agreement to go into business?
Due to the time-consuming nature of this document, some entrepreneurs may consider alternatives to a written agreement. Why not settle for an oral agreement instead? The trouble with an oral agreement, however, is in its name. The document isn’t in writing. You may struggle to recall the date of when a certain decision was made.
However, a written agreement allows you to go back and review that specific moment in full detail. It’s also a helpful document for other owners of the business to look at and review if they have any questions. A written agreement may take a bit of time to write out and complete, but it is well worth the investment to ensure smooth operations.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.