What is the difference between an operating agreement and a shareholder agreement?
A Limited Liability Company (LLC) consists of members and managing members who execute an operating agreement. A sub-chapter S corporation (S corp.) consists of shareholders, officers and directors who execute a shareholder agreement. The trend for most of the companies I represent has been setting up LLCs and drafting the appropriate operating agreements. What kinds of unanticipated problems have you seen arise between partners? The biggest problem I’ve run into is when a member comes into a company with only ‘sweat equity.’ If a company is opened and one partner agrees to work to earn his or her ownership interest and another partner is providing the cash to capitalize the business, both interests need to be protected through the operating agreement. The operating agreement should properly outline the agreement between the partners as to when the ‘sweat equity’ is earned and when the investing partner is paid back, if at all. Failure to properly outline these provisions in the operat
