Article by Kristen Toppin 

If you’ve ever tried to untangle the legal spaghetti that comes with running a family business, you’ve probably come across the terms “operating agreement” and “shareholder agreement.” And maybe, like many people, you wonder, “Aren’t these the same thing?” Not quite. While both are important documents that help keep a business (and family) from flying off the rails, they’re used in different types of business structures and serve slightly different purposes.

Let’s start with the basics. If your family business is an LLC, you’re going to be dealing with an operating agreement. Think of this as the business’s playbook. It lays out who owns what percentage, how decisions get made, how profits are shared, and what happens if someone wants out. It’s also the go-to document if cousin Eddie wants to bring his pet iguana into the office and call it a business partner. The operating agreement is flexible, which makes it a favorite among family businesses that want a little more wiggle room in how they run things. It can be customized to fit the personalities and quirks of your family members (within reason, of course).

Now, if your business is structured as a corporation, you’re in shareholder agreement territory. This document is all about the shareholders, the folks who own stock in the company. It covers who can buy shares, what happens if someone wants to sell their shares, and how to handle disputes. It’s a bit more rigid than an operating agreement, but that structure can be a blessing if things get messy (and in family businesses, let’s be honest, they sometimes do). A shareholder agreement helps prevent surprises, like Uncle Bob selling his shares to an outsider with zero interest in the family legacy but a lot of ideas about turning your company into a cryptocurrency empire.

One key difference between the two agreements is how they deal with management. In an LLC, the operating agreement might specify that all members run the business together, or it might designate a manager to call the shots. In a corporation, though, the board of directors makes the big decisions, and the officers handle the day-to-day. The shareholder agreement doesn’t usually say much about day-to-day management; it’s more concerned with ownership and control over time.

Another distinction is how these documents help with succession planning, always a hot topic in family businesses. An operating agreement can lay out exactly what happens if one member retires, dies, or (gasp!) marries into a rival family. A shareholder agreement does the same kind of thing, but in the language of stocks and shares. Both can be written with family values in mind, but the way they’re structured reflects the business type.

At the end of the day, whether your family business is an LLC or a corporation, having the right agreement in place is like having a good map. It won’t guarantee that the road is smooth, but it will help you avoid driving off a cliff when things get bumpy. And in a family business, where love, money, and tradition are all on the line, that kind of clarity is golden.

If you’re sitting around the kitchen table trying to figure out how to keep peace in both the business and the family, make sure you know which agreement you need, and make sure it actually exists. Because no one wants to sort out ownership issues during their 4th of July BBQ. Trust us on that one.