By: Katelyn J. Dougherty, Esq.
When starting a business, it’s crucial to establish clear legal frameworks to ensure the smooth operation and future growth of the enterprise. Two critical documents often considered by business founders are the Founder Agreement and the Operating Agreement (or a Shareholders Agreement for a Corporation). Understanding when and why to use each can be pivotal in setting the right legal foundation for your company.
Founder Agreement: Laying the Groundwork
When It’s Needed: A Founder Agreement is most relevant during the early stages of a startup, particularly when the business is in its conceptual or developmental phase. This agreement is crucial when there are multiple founders involved.
Key Elements of a Founder Agreement can include:
Operating Agreement: Structuring Operations
When It’s Needed: An Operating Agreement comes into play when the business is more established and typically when it’s registered as a Limited Liability Company (LLC). It’s vital for clearly defining the operational and financial decisions of the business, including rules, regulations, and provisions.
Key Elements of a Operating Agreement can include:
Choosing the Right Agreement
It’s not a matter of choosing one over the other; rather, it’s about understanding the right time to implement each agreement.
Start with a Founder Agreement: When your business is just a concept or a startup in the early stages, a Founder Agreement is essential. It lays the groundwork for how the founders will interact and manage the early stages of the business.
Shift to an Operating Agreement: As your business grows and becomes more structured, particularly if forming an LLC, an Operating Agreement becomes necessary. It provides the legal framework for managing the company’s operational and financial aspects.
Both agreements are legally binding and have significant implications for the business’s future. Therefore, it’s advisable to seek legal counsel when drafting these documents to ensure they are comprehensive and tailored to your specific business needs.
In summary, both Founder Agreements and Operating Agreements play vital roles at different stages of a business’s lifecycle. Start with a Founder Agreement to set the foundation among the founders, then transition to an Operating Agreement as your business grows and requires more defined operational structures. With the right legal frameworks in place, you can focus on growing your business with confidence and clarity.
Don’t have a business attorney? Get in touch with our team by emailing Info@harbourbusinesslaw.com.
DISCLAIMER: This blog is for educational purposes only and does not offer nor substitute legal advice. This blog does not establish an attorney-client relationship and is not for advertising or solicitation purposes. Any of the content contained herein shall not be used to make any decision without first consulting an attorney. The hiring of an attorney is an important decision not to be based on advertisements or blogs. Harbour Business Law expressly disclaims any and all liability in regard to any actions, or lack thereof, based on any contents of this blog.