Lessons from a Pedal Tavern: Why You Need a Good Operating Agreement

 In Blog, Litigation and Dispute Resolution

Pedal taverns are the talk of the town. To some, they are loud, dangerous, traffic-jam machines driving businesses out of downtown. To others, they are fun, grow the tax base, essential to tourism, and part of the new Nashville.

Whatever your view, I bet you never thought this about pedal taverns:  they show the need for a good operating agreement.  A recent lawsuit among owners of a party wagon gives us that lesson, and a cautionary tale.  It shows what can happen when new businesses fail to clearly define owners’ roles, rights, and responsibilities or rely on online legal documents instead of consulting with a business lawyer.

Heatherly v. Off The Wagon Tours, LLC involved two men who entered the party wagon business together but whose relationship later soured. The plaintiff claimed he was a member (basically, an owner) of the business, which was a limited liability company (LLC).  He asked to inspect the company’s business records.  But the defendant disputed the plaintiff’s membership claim and right to see the company’s records.

The plaintiff sued the LLC, and the parties engaged in a lengthy and costly court battle, including an appeal, about whether and when the plaintiff was a member of the LLC. The parties presented evidence about their efforts and investments, and their conversations and intentions about ownership interests when they formed the company.

The defendant had used Legal Zoom to form the LLC and prepare an LLC operating agreement. While that agreement identified the plaintiff as a member, he never signed it. At least one annual report also identified the plaintiff as a member. The parties then ran the business for a while before they had a falling out.

An Executed LLC Operating Agreement May Not Be Legally Required – But It Is Far Better To Have One

The lack of clarity arose in large part because the two men failed to execute the LLC operating agreement, which would have settled the issue and spared them from a destructive and expensive court battle.  An operating agreement is the document that sets forth the details of the relationships between the members and the LLC itself.

Among other things, the operating agreement defines core issues such as ownership interests, voting rights, business activities, management structure, and management authority. But a well-crafted agreement will also address circumstances that, while not desired or inevitable, are an inherent risk of any business relationship. By setting forth in detail what can and will happen when members want to part ways and transfer their interests, the agreement significantly reduces the chances of protracted litigation. It almost certainly would have spared Off The Wagon’s owners a courtroom battle.

Unlike many other states, Tennessee does not require LLCs to have written operating agreements. But as the Heatherly case clarifies, running a business without one can leave erstwhile business partners stumbling around for a solution to problems they could have easily taken care of at the start of their relationship.

Do You Really Want to Put the Future of Your Business in the Hands of a Website?

The defendant blamed Legal Zoom for the confusion that arose from the documents it prepared for the LLC. Presumably, there was little advice or guidance provided by the website; little if any discussion of what the owners should consider, an exploration of their goals, or an analysis of how they wanted to run or end the business.

If you are an entrepreneur forming your own business, you’re likely a person who’s used to taking care of things yourself; if something needs to be done for your new business, you’ll do it. Combine that DIY spirit with the seeming ease and affordably of legal websites and forms, and it can be tempting to use your laptop as your lawyer. But trying to save a few dollars now by not consulting with an experienced business attorney can cost you significantly more later.

As someone who litigates these sorts of business disputes in court later, I can tell you firsthand:  an ounce of prevention is worth a pound of cure.

If you need assistance forming your new business or preparing the required documents, please contact one of the business formation attorneys at Sherrard Roe Voigt & Harbison today.

[erwin widmer/EyeEm]/Adobe

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