Role of Operating Agreements in the Division of Privately Owned Businesses in Alpharetta

For all business owners, whether they’re going through divorce, not going through divorce, or contemplating getting divorced, an operating agreement can be very significant. If a business owner hasn’t already started the divorce process, there are certain things they can look at right now to prepare themselves and discuss with their attorneys regarding what the operating agreement requires in the case of a divorce. In this way, the role of operating agreements in the division of privately owned businesses in Alpharetta can be significant. Ask our attorneys for more information about dividing privately owned businesses.

Understanding Operating Agreements in Alpharetta

In general, the operating agreement is the most key document you can have in a business. Under a limited liability company, it would be called an operating agreement, but for a corporation, it is usually called a “shareholders’ agreement.”

Certain bylaws must be followed when incorporating a corporation under the Georgia Business Corporation Act, in which case it’s called a co-operating agreement (i.e., a combination of your shareholder’s agreement and your bylaws all in one document).

Forming a limited liability company or a corporation allows you to separate your business from yourself individually, thereby protecting your personal assets and other business ventures from the liabilities that might be associated with that particular business. To preserve that independence, you need to memorialize in writing that it is in fact an independent and separate entity, and the way that you do that is through an operating agreement. In other words, an operating agreement prevents others from being able to come after the business owners personally.

That being said, the operating agreement also deals with:

  • The management structure of the company;
  • How decisions are made;
  • Who has control;
  • Who has the right to make certain decisions;
  • The vote requirements for certain matters; and
  • The ownership structure, including membership rights and whether there are various classes of ownership with different rights and obligations associated with them;
  • Exit strategies for when an owner eventually exits the business (e., passes away or becomes permanently disabled); and
  • Dispute Resolution.

Impact of an Operating Agreement on a Divorce

Exit strategies in operating agreements typically include disassociation and buyout. Disassociating someone means stripping them of all non-economic rights, including the right to vote and have a say in business decisions. However, this does not get rid of their economic rights. In other words, removing someone from the company doesn’t mean they don’t have economic rights. In order to redeem those economic rights, you would have to actually purchase their interest, which would be the buyout provision.

Divorce is often a disassociation trigger. Even filing a petition may trigger the right of the other members of the business to disassociate that member, regardless of whether the divorce actually consummates. One spouse could claim their economic rights through a court order that awards them distributions based on the economic rights of the member spouse. By allowing the disassociation, the spouse retaining ownership over the business can protect and set a value on certain distributions.

It is possible to buy out your spouse based on the buyout provisions, and whatever value is paid at that time will be part of the marital estate. This process establishes the owner’s share of the business. It is therefore advantageous for spouses who own a business together to include divorce as a provision within the operating agreement so the one retaining ownership can disassociate from the non-owning spouse upon divorce and, if they so choose, buy them out of their economic rights in the company.

Impact on the Division of Business Interests

In Georgia, the presumption is that marital assets, including any business interests, that were gained during the time of marriage will be split 50-50 between spouses. You may prove to the court that the division should be less or more than that, depending on your circumstances.

In the case of a partnership where the members are at risk of having an ex-spouse getting some interest of the business, the operating agreement will indicate whether the member who is going through divorce has a fiduciary duty to tell their business partners that they have received divorce papers or are going to file for divorce themselves.

Generally, if it is something that would trigger a disassociation, the business owner would be obligated to tell the other members that something has happened in their life that gives their business partners the right to disassociate them. Once that petition is filed and there is in fact this disassociation right for divorce, you would need to let other business members know, because it implicates a material provision within the operating agreement.

Because the operating agreement is a deal you create, you could draft it in such a way that divorce is not a disassociation right. That way, if you find yourself going through a divorce, it doesn’t give the other members the right to do anything with regards to your interest. Additionally, in that case, you would not be obligated to let other members of your business know when the divorce is filed.

Interests vs Shares

The Georgia Business Corporation Code or Act uses a different statutory scheme than the Georgia Limited Liability Act. Many people who form an LLC don’t realize they are governed by the Georgia Limited Liability Act and not the Georgia Business Corporation Code.

Furthermore, a business owner can make a deal with the IRS that they’ll be taxed under subchapter S of the internal revenue code, for example, which is an S Corporation. They may then incorrectly assume they’re a corporation because they’ve elected to be taxed as an S Corporation, when they are not actually governed by the Georgia Business Corporation Act or Code. Instead, that election with the IRS operates under the regulatory framework of subchapter S under the Internal Revenue Code.

Regardless of whether you have an interest in a business or shares in a corporation, it’s still subject to the marital estate.

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