Operating Agreements and Shareholder Agreements: Why Georgia Businesses Regret Skipping Them

Launching a business in Georgia is a significant achievement. Whether you are opening a boutique in Savannah, a tech startup in Atlanta, or a manufacturing firm in Augusta, the initial phase of business formation involves a high degree of momentum. You file your formation Articles, secure your EIN, and open your doors. At this stage, optimism is high, and the relationship between founders is typically at its strongest.

In this atmosphere of growth, many owners overlook the most critical step in protecting their long-term interests: the creation of a comprehensive internal governance document. For a limited liability company (LLC), this is an Operating Agreement. For a corporation, it is a Shareholder Agreement.

Skipping these documents is often a choice born of a desire to save time or avoid legal costs. However, many Georgia small business owners eventually regret this omission. Without a written rulebook, you leave the future of your company—and your personal financial well-being—to chance, emotion, and the generic default rules of the state.

Internal Governance

You should view these agreements as the private constitution of your business. While the documents you file with the Georgia Secretary of State are public records that provide a basic birth certificate for the entity, the Operating Agreement or Shareholder Agreement defines how the business actually functions behind the scenes.

These contracts address several vital questions:

• How do we make major decisions?
• How do we distribute profits and handle losses?
• What happens if a partner wants to leave or passes away?
• How do we resolve a fundamental disagreement that threatens the business?

By addressing these questions at the outset, you establish a professional framework that protects every party involved. This clarity does not signal a lack of trust; rather, it demonstrates a mutual commitment to the success and stability of the venture.

The Risk of Relying on Handshake Agreements

Many partnerships begin among friends, family members, or long-term colleagues. In these scenarios, there is often immense trust between partners. While trust is a necessary ingredient for a successful partnership, it is not a substitute for a legal structure.

Business relationships, like all human relationships, evolve. People’s personal lives, financial needs, and professional goals change. A partner who is fully committed today may face a divorce, a health crisis, or a change in heart five years from now.

Without a formal partnership agreement, you have no objective mechanism to handle these shifts. Relying on an oral understanding or a handshake deal leads to ambiguity. When people’s livelihoods or even just the survival of a small business are on the line, ambiguity is the primary driver of expensive, relationship-ending litigation.

Common Points of Failure Without a Written Agreement

When a business lacks a tailored Operating or Shareholder Agreement, several specific scenarios can lead to catastrophic results.

1. Management Deadlocks

In a two-person partnership where each owner holds a 50% stake, deadlock is a constant risk. If you and your partner disagree on a major move—such as taking on a new lease, hiring a high-level executive, or selling the company—and you have no tie-breaking mechanism, the business stalls.

A well-drafted agreement provides solutions for deadlock, such as:

• Designating a Tie-Breaker: Appointing a neutral third party to decide on specific issues
• Buy-Sell Provisions: Allowing one partner to buy out the other under specific terms if an impasse cannot be resolved
• Escalation Procedures: Requiring formal mediation before any further action is taken

2. The Voluntary or Involuntary Exit

What happens if your partner decides to quit and work for a competitor? What if they pass away and their ownership interest transfers to a spouse who knows nothing about your industry?

Without a Shareholder Agreement or Operating Agreement, you generally cannot control who your partners are. In Georgia, membership interests in an LLC or shares in a corporation are personal property and are generally transferable. Unless you have a written contract that restricts the transfer of these interests, your partner could sell their stake to anyone.

A robust agreement includes buy-sell provisions. These clauses give the company or the remaining owners the right to purchase the interest of a departing, deceased, or disabled owner at a fair price, ensuring the business stays in the hands of those who are active in its success.

3. Capital Calls and Financial Obligations

Businesses often require more cash than the founders initially anticipate. If the company needs an infusion of $100,000 to survive a slow quarter, how is that money raised?

• Are all partners required to contribute proportionately?
• If one partner cannot contribute, does their ownership percentage get diluted?
• Can one partner loan the money to the business at a high interest rate?

If your agreement does not specify these rules, you may find yourself in a position where you are carrying the entire financial burden of the company while your silent partner continues to own half the profits.

Investing in Your Business’s Longevity

Writing an Operating Agreement or Shareholder Agreement requires you and your partners to sit down and have honest conversations about the future. You must discuss money, power, exit strategies, and worst-case scenarios.

While these conversations can feel uncomfortable during the honeymoon phase of a new business, they are far less uncomfortable than a lawsuit. The time and resources you spend now to codify your internal operations act as an insurance policy for your company’s future.

At MacGregor Lyon, we see firsthand how much stress and capital can be saved when business owners take the time to draft these documents early. We work with small business owners to understand your specific goals and create a custom framework that provides the stability your business needs to thrive in the Georgia market.

Contact MacGregor Lyon now to protect your business and move forward with confidence.