Does Your Operating Agreement Actually Run Your Company?

Your operating agreement was written to start your company, but was it built to run it? The difference matters. 

by Brent Helms 

An agreement built to run your company addresses five “D”s: death, disability, divorce, departure and deadlock. Why? Over your company’s lifetime, at least one “D” is likely to occur. How your agreement handles each “D” decides whether your company operates, litigates or terminates.

Your Interest

Your interest in your company is divided by Alabama law into two categories: 1) economic and 2) governance. Your economic interest lets you share in distributions. Your governance interest lets you make decisions, vote and bind the company. That distinction is important. Why? Unless your agreement states otherwise, only your economic interest passes to the person you designate. So, if one of the five “D”s occurs and only the economic interest transfers, the person you expected to run your company can merely collect a check — if they can even access the bank account to cut it.

As you review your agreement for each of the five “D”s, ask: Does my agreement address the “D”? If so, who ends up with my interest? Which interest do they get? Do I agree with the result?

Death

If your agreement is silent on death, only your economic interest passes to your estate. No governance passes with it. Your heirs may receive distributions, but they get no vote and no voice. If you are the company’s only member, that is a problem the day you die. Until the probate judge says so, no one can access your company’s bank account, make a distribution or run your company. If there are other members, your company will likely keep running, but your interest goes through probate. And probate is public and slow.

Even when an agreement addresses death, most simply route your interest to your estate. Anytime you see the word estate, think “probate court.” 

For example, if you were the only person authorized on your company’s bank account, a bank is unlikely to grant access to anyone without letters testamentary or letters of administration — which typically take weeks or months to obtain from a probate judge. What happens to your business during that waiting period? You can fill in that blank.

What can you do? Two options solve the problem.

First, name a person in your agreement to act as an interim member with governance rights, triggered by your death, and give your economic rights to your heirs. A death certificate is all that’s needed for the interim member to keep the company running while your estate settles. 

Second, designate someone in your agreement as a permanent member with governance and economic rights. 

Disability

If your agreement is silent on disability, do you have power of attorney? If so, does it grant your agent authority over the operation of an entity or business (Ala. Code § 26-1A-209)? If so, the agent may exercise governance rights.

Without a power of attorney, the answer is usually a conservatorship through probate court. A conservator is appointed to manage your estate and finances, including your company. But here is the trap: Under Ala. Code § 10A-5A-6.02, the moment the judge appoints a conservator, your membership is dissociated. The very act your family takes to help — getting a conservator appointed — is what severs you from your company.

Once you are dissociated, neither you nor your conservator may participate in the direction or oversight of your company. You are, however, entitled to an economic interest. But what good is that if no one can access your company’s bank account? If a conservator is named, make sure the judge enters an order granting the conservator the right to govern the company.

If your agreement addresses disability, does it also address a power of attorney? Your agreement supersedes your power of attorney. Even powers granted in Ala. Code § 26-1A-209 are subject to the terms of your agreement. So, if your agreement says no agent acting under a power of attorney may exercise governance rights, the agreement wins. If your agreement is silent on this point, your agent may exercise governance rights only if the power of attorney itself grants the proper authority.

What can you do? Two options, plus one rule.

First, a power of attorney that allows governance rights under Ala. Code § 26-1A-209, paired with a permissive provision in your agreement, allows an agent you choose to run your company while you are disabled. 

Second, as with death, name a person to act as an interim member for as long as you are disabled. And again, you can split the governance rights and economic rights, so that you benefit from the company’s distributions during your disability.

The rule that applies to both: Define in the agreement what it means to be disabled and to be restored to capacity. If those terms are silent, a judicial determination may be required — and you will have walked right back into dissociation.

Divorce

Alabama is an equitable-distribution state. Marital property is divided equitably, but not necessarily equally. Your interest in your company can be marital property. So, in a divorce, the value of the interest is potentially on the table.

If your agreement is silent on divorce, a court generally cannot admit your spouse as a member of the company. At most, the judge can reach the economic interest and grant your spouse distributions only. That doesn’t sound too bad. But it is.

The damage is three-fold: 1) The company’s books get opened in discovery and a valuation fight follows; 2) The court may award all or some of the economic interest to your spouse, so distributions flow to a stranger to the business; 3) To fund the division, you may be forced to buy out or even sell your interest, draining your company of cash. In a multi-member company, the nightmare isn’t an ex with a vote, it’s an ex with a check and a valuation lawyer.

What can you do? Three options solve the problem.

First, make a divorce filing a triggering event for a right of first refusal or a mandatory buyout at a defined price, so value is satisfied in cash and the interest is protected by the members.

Second, require that any interest a court awards an ex be economic-only and immediately subject to repurchase without admission.

Third, and best of all, sign a pre- or post-nuptial agreement that keeps your interest separate property and waives your spouse’s rights to it in divorce and at death.

Departure

If your agreement is silent on departure, you have a problem. A member who walks away is dissociated, and a dissociated member has no governance rights — only an economic interest. There is no buyout. In 2014, Alabama deliberately dropped the old mandatory fair-value purchase on withdrawal. Today, if you leave, you surrender your vote and get distributions only if and when the company chooses to make them.

If your agreement addresses departure, can you sell your interest, how is it valued and must a buyer be admitted by the other members? 

And absent an expulsion provision, the other members may not be able to remove a problem member.

What can you do? Cure all of it with a buy-sell agreement. Define the triggering events (e.g., voluntary withdrawal, retirement, expulsion for cause, disability, death), fix a valuation method up front, supply a funding mechanism and grant put/call rights so an exit is priced and orderly. Without a buy-sell, leaving your company is easy, but getting your money out is impossible. You can walk away from the vote. You can’t walk away with the value.

Deadlock

If your agreement is silent on deadlock, litigation is usually the result. That’s time-consuming, draining, costly and it can ruin a company.

What can you do? Name a path before you need one. You can require mediation or build a buy-sell trigger, so the deadlock forces a buyout and one owner exits. You can give one owner a tie-breaking vote. 

The option I most often recommend is an independent third party empowered to decide the specific deadlocked issue and break the tie. There’s no one-size-fits-all answer. The point is to pick the mechanism now, before a deadlock arises.

Conclusion

Every operating agreement starts a company. Whether yours runs one depends on the five “D”s — so review it now, while the answers are still yours to choose.

About Helms Law Group, LCC

Helms Law Group, LLC is a boutique law firm in Fairhope, serving families and business owners in Fairhope and across Baldwin County. The firm focuses on estate planning, elder law, probate and business planning — including the operating agreements, buy-sell arrangements and succession structures that decide whether a company survives a transition. Every client works directly with Brent, and the work is built around one idea: When your affairs are in order, you stop worrying about the what-ifs and get back to running your life and your business.

For business owners, that means looking at the company the way you actually live with it — as your family’s largest and most complicated asset. The firm plans for the day an owner dies, becomes incapacitated, divorces, departs or deadlocks with a partner and makes sure the business documents and the estate plan work together instead of against each other. The goal is straightforward: Keep the company operating, keep the family out of court and keep you in control of the decisions while they are still yours to make.

The firm keeps a deliberately limited practice, so every engagement gets real attention, and clients know the cost up front. Helms Law Group also hosts regular workshops for owners and families who want to understand their options before they hire anyone. To learn more or schedule a consultation, visit helmslawgroup.com or call 251-217-9900.

Brent Helms is the founding attorney of Helms Law Group, LLC in Fairhope, where his practice covers business planning and succession, estate planning, elder law and probate. An entrepreneur for more than 20 years, he has started, bought, run and sold businesses of his own, so he advises owners from experience rather than theory. He previously served as a Special Probate judge, a county conservator and a county administrator — giving him a firsthand view of what happens to a company and a family when an owner dies or loses capacity without a plan in place. He and his wife, Laura, are raising their seven children in Baldwin County.