You remember Jim, Mary, Brett and Paul. They want to open a gelato shop, featuring authentic Italian desserts like gelato and tiramisu, along with sub sandwiches that sing of Southern Italy.
Mary was to provide a majority of the funds, as well as the authentic Italian flavor and atmosphere for the restaurant. Brett, with the business background, supplied a comprehensive business plan. Jim and Paul, as contractors, would design and build the restaurant.
Now, the remaining question was how to organize this LLC to help assure its ultimate success. That’s what they came to me for.
As I explained to them, hashing out all the various components of an operating agreement serves many purposes: 1) it can identify some unforeseen problem areas that need to be resolved; 2) it can provide a roadmap for the foreseeable future; and 3) test whether this is a team of business partners that can work together.
So, I decided to begin with two of the more straightforward components: how much money everyone was to contribute, and how much time each person would devote to the business.
These are crucial questions.
First, the partners needed to decide how much initial capital the fledging business required. For some businesses such as this Italian dessert shop (with a more robust menu coming), the four agreed that at least $300,000 was needed to get the idea off the ground. They had to have cold storage for the gelato and Italian ice. A walk-in refrigerator to keep all of the ingredients for sandwiches fresh seemed wise. And of course they needed a storefront, which had to be constructed and furnished appropriately.
Mary had agreed to supply the majority of the beginning funds. She suggested that she’d put up $150,000, with the other half supplied by the other three partners ($50,000 each).
This caught Jim off guard. He was coming out of a nasty divorce. Consequently, he was short of cash. Brett and Paul thought Mary’s proposed split of capital requirements was fair.
So, this was the first problem the four had to resolve if the business as originally designed was to go forward. Or, one or more of the partners could decide to withdraw. Or, the structure of the partnership could change, perhaps with Jim receiving a reduced share of ownership.
This discussion segued into a lively conversation on Topic No. 2, namely how much time each would devote to the business.
Jim suggested that he could spend a significant amount of more time getting the business started if the other three would agree not to reduce his percentage of ownership.
This negotiation evolved into how much everyone would be at the restaurant.
Mary said she expected that her share of the workload would be more up front, getting the recipes for everything on the menu and recommending what the kitchen needed to accomplish this. But once the enterprise got rolling, she hoped she could step back as her debt collection business needed her attention as well.
The dialogue then shifted to Brett and Paul. Brett said he’d already spent a lot of time putting together the business plan. Paul knew that his construction background was crucial to making sure that everything was built well and reasonably priced. So, he anticipated spending a lot of time on getting the venture operational, and he was fine with this.
I pointed out that all they had talked about was the beginning of the business. I asked who would be serving the food to the anxious customers. Who would supervise the employees? How involved (and in what way) would each partner be in the restaurant once it opened?
This was not something they had considered. I told them that a new business is like having a baby. The gestation period has all of its own issues, and the actual birthing process can be quite painful. But once the child is born or the business opens up, a whole raft of new issues, concerns, and challenges will continue to arise. So, it’s a good idea to have a structure in place before the birth to help manage all of the wonderful and sometimes awful things that occur in the life of a business.
I said that we would next delve into topics such as management in our next discussion.
Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at [email protected]. His column represents his own views, and not necessarily those of The Signal. Nothing contained herein shall be or is intended to be construed as providing legal advice.