You started a company with a partner and never wrote down what happens if one leaves

The conversation you and your partner keep postponing

You formed the company together three years ago. Someone filed the certificate online, you opened a bank account, and you got to work. The business is profitable now. It has employees, a lease, maybe a line of credit. And the two or three of you have never put in writing what happens if one of you wants out, gets divorced, becomes disabled, dies, or simply stops showing up.

I have practiced business law in Dallas since 2003, and I can tell you that this is the most common gap I find when a new client hands me their formation documents. It is not negligence. When the company was worth nothing, there was nothing to argue about. The problem is that the paperwork does not get more important gradually. It becomes urgent all at once, on the day something changes, and by then the owners are no longer on the same side of the table.

This guide explains what an operating agreement, called a company agreement in Texas, and a buy-sell agreement actually decide, what tends to go wrong without them, how to review what you have, and what the process of getting it right looks like. It is not advice on your situation; it is meant to make the conversation with a licensed attorney shorter.

What goes wrong when the terms were never written

When owners have not agreed on the rules, the default rules apply, and the default rules were written for nobody in particular. A Texas LLC with no company agreement is governed by the statute's defaults on voting, distributions and management, which may be nothing like what the owners assumed. The more serious gaps appear at the events that end a partnership. If an owner dies, their interest generally passes to their heirs, which means your new partner may be a spouse or an adult child who has never worked in the business. If an owner divorces, the interest may be part of the property divided in that proceeding. If an owner wants out and there is no price formula, the only way to set the price is to argue about it.

Deadlock is the quiet one. Two equal owners who disagree about a major decision have no mechanism to break the tie, so the decision does not get made, and the business drifts while the relationship sours. Minority owners have the opposite problem: without written protections, a majority owner may be able to set their own salary, decide whether any profit is distributed and leave the minority with a tax bill and no cash. Most owner disputes that reach my office trace back to one of these events.

• Death: the interest passes to heirs who become your partners
• Divorce: the interest may be divided as marital property
• Disability or long absence with no mechanism to adjust ownership or pay
• Voluntary exit with no agreed price or payment terms
• Deadlock between equal owners with no tiebreaker
• Majority control over salary and distributions with no minority protections

Review what you have before you call anyone

Find every document connected to the entity. The certificate of formation filed with the Texas Secretary of State. Any company agreement, operating agreement, bylaws or shareholder agreement, even a draft nobody signed. The minutes or written consents, if any exist. The tax election, since whether the company is taxed as a partnership, an S corporation or otherwise affects how a buyout is structured. The loan documents and the lease, because they often contain clauses that are triggered by a change in ownership.

Then read the agreement you have, if there is one, with five questions in mind. Does it say who manages and how votes are counted? Does it say what happens on death, disability and divorce? Does it set a method for pricing an interest and a schedule for paying for it? Does it address how profits are distributed and who decides? Does it restrict an owner from selling to an outsider? If the answer to any of those is no, or if you cannot find an agreement at all, write down the answer you and your partners would want. Compare notes; the differences are the terms that need negotiating.

Also gather the practical facts an attorney will ask for: who owns what percentage, what each owner contributed, what each is paid and in what form, whether there are personal guarantees, and whether any owner has a life insurance policy that could fund a buyout.

• Certificate of formation and any agreement, signed or draft
• Minutes, consents and the tax election
• Loan and lease documents with change-of-ownership clauses
• Each owner's percentage, contributions and compensation
• Personal guarantees and any life or disability insurance in place
• Each owner's private answers to the five questions above

When it can wait a quarter, and when it should not

If all owners are healthy, aligned and talking, there is no transaction pending and the company is small, you have time to do this properly over a couple of months. That is the best possible moment, because everyone is negotiating behind a veil of not knowing who will leave first, which produces fair terms.

It should not wait if any owner is going through a divorce or a health problem, if a bank or investor is asking for your documents, if you are about to take on a new owner or key employee with equity, if the owners are already disagreeing about money, or if one owner has mentioned leaving. Once a triggering event has happened, the agreement is being negotiated with the outcome known, and the owner who stands to benefit from the default rules has little reason to sign. I work with owners across Dallas–Fort Worth, and the calls I would most like to receive a year earlier are the ones that come the week after the event.

How the terms actually get settled

My approach is what I call straight talk counsel: the owners should understand their own documents well enough to run the company by them. The work begins with a meeting with all owners together, and often the company's CPA, to walk through how the business actually operates and what each owner expects. We talk about the hard events plainly. A fair agreement has to work from both chairs, the one who leaves and the one who stays.

From that conversation, I draft or revise the company agreement so that governance matches reality: who manages, which decisions require unanimity, how new owners are admitted, how profits are distributed and how tax distributions are handled so no owner is left paying tax on income they never received. Then the buy-sell terms: the events that trigger a buyout, who has the right or the obligation to buy, how the price is determined, and how it is paid over time so that the company is not drained to pay a departing owner. Where the owners want it, life or disability insurance is coordinated with the CPA and an insurance professional to fund a buyout at death or disability.

The drafts go to all owners with a plain-English summary of each provision. We revise until everyone understands and agrees, the documents are signed, and the company's records are updated. I then recommend a short annual review, because businesses change.

• Meeting with all owners and, ideally, the CPA
• Governance terms: management, voting thresholds, admission of new owners
• Distribution and tax distribution rules
• Buy-sell triggers: death, disability, divorce, departure, deadlock, default
• Valuation method and payment terms that the company can survive
• Insurance funding where appropriate, coordinated with your advisors
• Plain-English summary, signatures and an annual review

What drives the cost of getting this done

Legal fees for this work depend on complexity more than on company size. Two owners with equal shares and a simple business are at one end. Several owners with different percentages, classes of interest, outside investors, real estate held in a separate entity, or a professional practice subject to licensing rules are at the other. The number of hard conversations also matters; if the owners already agree on the big questions, drafting is efficient, and if they do not, time is spent helping them reach terms, which is still cheaper than the alternative.

Whether you are starting from a draft agreement or from nothing changes the scope, as does coordination with a CPA on tax elections and with an insurance professional on funding. I discuss fees at the first meeting, after I have seen the documents.

How to choose a business attorney for owner agreements

Look for an attorney who both drafts agreements and litigates disputes over them. The ones who have spent years in court over badly written buy-sell clauses know which provisions actually fail and write around them. Ask whether they will work with your CPA rather than around them, because the tax treatment and the legal structure have to fit together. Ask whether they represent the company or one owner, and make sure everyone understands the answer; in many cases the attorney represents the entity and each owner is free to have their own counsel review the terms.

Ask how they explain documents. If you cannot understand your own company agreement after the attorney walks you through it, the problem is the document or the attorney. And ask what happens after signing.

• Drafts the agreements and has litigated disputes under them
• Works alongside your CPA on tax and structure
• Clear about whom they represent
• Explains every provision in plain language
• Available for review as the business changes
• Licensed in Texas, with business entities as a core practice

Mistakes that turn partners into opposing parties

The most expensive mistake is using a downloaded template without reading it. Those forms often leave the key terms blank or filled with defaults that no owner would choose knowingly, and they rarely address Texas-specific issues such as community property. The second is agreeing on a buyout price with no payment schedule; a departing owner entitled to a lump sum can force the company to borrow or liquidate to pay it. The third is ignoring divorce. In a community-property state, an owner's interest may be at issue in a divorce, and an agreement that addresses it protects the business and the other owners.

I also see owners who sign the agreement and then run the company as if it did not exist: no meetings, no consents, personal and company funds mixed, decisions made by text message. That behavior can undermine the liability protection the entity was formed to provide and makes the agreement hard to enforce. And a good agreement signed this quarter beats a perfect one that never gets signed.

What the first meeting with me looks like

We schedule an initial meeting at my office on North Central Expressway in Dallas, or by phone or video. You send the documents you found ahead of time, and I review them before we talk. In the meeting I tell you what the documents say, what they do not, and what I would recommend addressing first. We discuss fees and scope so there are no surprises.

If you engage me, I meet with all the owners, coordinate with your CPA, and prepare the drafts with a plain summary of each section. We work through revisions until the owners understand and agree, then sign and update the company's records. Afterward, I am available when the business changes: a new owner, a new line of business, a sale, or a dispute that you would like resolved before it becomes a lawsuit. The point of the whole exercise is simple. You and your partners should be able to govern your own company by your own rules, without creating personal liability, and without ever needing to find out what the default rules would have done to you.

Questions people ask me