Buying into a franchise with a business partner means signing a franchise agreement. However, that document alone does not govern how co-owners run the business day to day. Without clear rules for managing the business, partners may face disagreements over decision-making, ownership interests, responsibilities and other important issues.
An operating agreement can address these issues by defining each partner’s rights, share of the business and role in decision-making.
What happens when you skip an operating agreement
Franchise partners who form an LLC without an operating agreement may have less control over how the business is managed and how important decisions are made. Without clear provisions, default state rules may apply to issues such as profit sharing, voting rights and each partner’s authority to act for the LLC.
Some issues that may arise are:
- Equal profit and loss sharing: Without an agreement stating otherwise, partners can and should be divided profits and losses equally. This can cause disagreements if the partners have put in different amounts of money or if they expect to receive different shares of the business.
- Equal voting rights: Partners in a firm may have an equal say in the major decisions regarding the business. This may become an issue when one partner expects greater management control or when a decision affects the franchise relationship.
- Broad authority to bind the LLC: Without limitations of authority, a partner may decide an issue or may cause the firm to enter into a contract that obligates the limited liability company. Other partners would be responsible for any losses experienced.
These default rules can conflict with the franchise agreement, for instance, if the operating agreement allows a partner to transfer an ownership interest without the franchisor’s approval, the partners could face a conflict between the two agreements.
What Clifton franchise partners should do before signing
An operating agreement and a franchise agreement serve different purposes, so neither replaces the other. Partners should align both agreements to ensure the LLC’s internal rules do not conflict with the franchisor’s requirements, helping them avoid disputes and protect their investment in New Jersey. Consulting an attorney can help partners review both agreements, identify potential conflicts and ensure the terms protect their interests while meeting the franchisor’s requirements.