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The Importance of Operating Agreements

Partnerships are common in boat ownership, but they rarely last

February 3, 2020
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Three sport fishing boats out on the open sea.
Partnerships can be a great way to split expenses of boat ownership, but having an operating agreement in place is critical. Thomas Spencer

I often hear vessel owners, brokers and others in the marine industry ask why they need an attorney to form a limited liability company, when filing one form online can typically accomplish it. The truth is you do not need an attorney. However, forming the entity itself is not the most complex part of the process. Rather, it’s the documents that go along with it, including corporate resolutions and an operating agreement, among others, that are often more ­important. Though not typically required in most states, the operating agreement in particular carries a great deal of value, especially when a company is comprised of multiple members.

What is It?

An operating agreement is signed by all members, and establishes the framework and structure of the business. The agreement can be customized to fit the relevant operation and arrangement between the members, but it always contains certain information. To begin with, the document identifies the members and officers of the company, which is especially important in states where such information is not public record. It also covers the company’s governing rules, including managerial structure, distribution of profits and expenses, voting rights, and the affairs to be conducted when a member dies or perhaps wants to sell an ownership interest. To put it another way, the ­operating agreement provides a documented set of rules, rights, obligations and procedures to reference when a dispute arises between some or all of the members.

Watch: Check out this sailfish swimming in a residential canal in Naples, Florida.

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MultiMember Operations

Partnerships are quite common in the sport-fishing industry. For example, there are many scenarios in which two or three people own boats or charter operations together. A partnership can be a great way to split expenses and responsibilities, but it can be difficult to keep all parties’ interests infinitely aligned. The unfortunate reality is that most partnerships ­eventually fall apart.

I have two close acquaintances currently dealing with failed partnerships, both of which started out profitably but are now in lengthy disputes resulting in litigation. Neither of these partnerships had operating agreements in place, which makes the situations much more difficult, time consuming and expensive.

Buyouts

A crucial part of an operating agreement are buyout provisions, especially as it relates to partnerships. Some state laws might even force or require dissolution of a company without such an agreement. A buyout can be triggered by a member who simply decides to leave, but also by other types of events, including bankruptcy, death, retirement, disability or even a divorce settlement in which an ex-spouse is given an ownership interest in the company.

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The buyout provisions should establish guidelines for managing changes in ownership and identify methods for preventing unwanted buyers from obtaining an interest in the company. The provisions should also specifically outline how to value the ownership interest at the time of a member’s ­departure. Normally, the provisions provide an option for other members to buy back the ownership interest from a departing member within a certain period of time. The buyout provisions can greatly vary in complexity depending on the type and size of operation, but it is a crucial part of the operating agreement and would certainly be a huge benefit to my two acquaintances described above.

Corporate boat ownership can be a viable option in the right circumstances. Learn more here.

The reality is that all limited liability companies should have an operating agreement in place, especially when there is more than one member. A company can certainly be formed without the assistance of an attorney, but I do advise seeking help from a professional. There are many ways a dispute can occur, and a thorough operating agreement is an important tool to ensure that terms are agreed upon at the time of formation.

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