Business Relationship Design: Preventing Business Partner Disputes Before They Start

When two people decide to go into business together, they usually spend considerable time discussing their idea, their market, and their financial projections. They will carefully choose a business name, form an LLC, and open a business bank account.

What they often do not spend enough time discussing is the relationship they are creating with one another.

After more than 30 years representing Virginia business owners, I have observed that most business partner disputes do not arise because one owner is dishonest or acted in bad faith. Instead, they often arise because two well-intentioned people had different expectations about how the business would operate. Those expectations may never have been discussed. Or they may have been discussed casually but never documented in the LLC's Operating Agreement. Rather than thinking of an Operating Agreement as simply another legal document, I encourage business owners to think of it as the blueprint for one of the most important business relationships they will ever have.

I call this process Business Relationship Design.

The Law Doesn't Create the Relationship

Business partners choose one another for many reasons. They may have a personal relationship that forms the foundation for working together, bring complementary skills, share a common vision, or simply enjoy working together.

The law does not create that relationship. The law gives it structure.

A well-drafted Operating Agreement does not make people trust one another or communicate more effectively. It cannot guarantee that partners will always agree. What it can do is capture the decisions the owners make while they are thinking clearly and working toward the same goals. In that sense, the agreement is less about drafting legal provisions and more about documenting important conversations.

Eight Conversations Every Business Owner Should Have

Every business is different, and every ownership relationship is unique. Nevertheless, I encourage prospective business partners to discuss several important questions before they sign an Operating Agreement or other governing document.

1. Why are we choosing each other?

Why are these particular individuals becoming business partners?

What strengths does each person bring to the business?

What concerns should be discussed openly before the company is formed?

2. Why are we building this business together?

Are the owners trying to create a lifestyle business, build a company for future sale, create a family business, or pursue another goal? Shared expectations at the beginning often prevent misunderstandings later.

3. How will we make decisions?

Not every decision should require unanimous approval. Partners should discuss who will manage day-to-day operations, which decisions require member approval, and how disagreements will be resolved.

4. What do we expect from each other?

Many disputes begin when one owner believes another is not contributing fairly. Partners should discuss roles, responsibilities, time commitments, compensation, and performance expectations before those issues become sources of frustration.

5. What happens if one of us stops contributing?

Businesses change. People change. Someone may reduce his or her involvement, fail to make an agreed capital contribution, or simply lose interest in the business. Discussing these possibilities in advance allows the owners to establish fair procedures before emotions become involved.

6. How will we handle money?

Money is one of the most common sources of disagreement among business owners. Partners should discuss distributions, additional capital contributions, member loans, and the financial expectations each owner has for the business.

7. What happens when life changes or we disagree?

No one begins a business expecting to become involved in a dispute with a partner. But deadlock, disproportionate efforts and contributions, a desire to leave the business, retirement, disability, divorce, bankruptcy, and death are realities that every business should anticipate. An Operating Agreement can establish practical procedures for addressing these situations before they threaten the business itself.

8. How will we exit well?

Every ownership relationship eventually changes. Whether an owner retires, sells an interest, or simply decides to move on, the governing agreement should establish fair procedures for valuation, payment, and ownership transition. Planning for an exit does not demonstrate a lack of confidence in the business. It demonstrates respect for the relationship.

The Agreement Should Reflect the Relationship

One of the most common misconceptions about Operating Agreements is that the owners should simply download a form and sign it. Forms can provide a useful starting point, but they should not substitute for thoughtful conversations.

The purpose of those conversations is to create an agreement that reflects the unique relationship the owners have intentionally designed, rather than one based on assumptions made by someone else.

Every business partnership is different. The Operating Agreement should reflect those differences.

Better Conversations Lead to Better Agreements

The goal is not simply to draft an Operating Agreement. The goal is to build a stronger ownership relationship. A well-drafted agreement does not eliminate disagreements. Instead, it provides a framework for addressing disagreements before they damage the business or the relationship between its owners.

Business owners devote significant time to designing their products, services, and business plans. They should devote the same attention to designing the relationships on which those businesses depend.

The conversations come first. The agreement simply memorializes the decisions that result from those conversations.

Every business relationship is unique. Your Operating Agreement should reflect the relationship you and your business partners have intentionally designed.

If you are forming a new business, bringing on a new owner, or reviewing an existing Operating Agreement, I'd be happy to help you think through these conversations and develop an agreement that reflects your goals and your relationship.