The document business owners most regret skipping

Every year, business partners who once shared the same vision, the same enthusiasm and the same handshake end up in courtrooms — spending hundreds of thousands of dollars fighting in court over something that could have been prevented for a few hundred at the very beginning.

That's not a hypothetical. It's a pattern Donald F. Kochersberger III sees repeatedly in his practice as a Member Attorney and Litigation Department Director at Business Law Southwest in Albuquerque. These combative scenarios were also the motivation for his firm to develop proprietary software to help people avoid them. For a few hundred dollars, the software allows business owners to build customized operating agreements that are far more protective than any off-the-shelf template. It also has an option to add a consultation with an attorney, which is still a lower-cost alternative to full legal drafting.

"It's just depressing to see people spend money that could be used in so many better ways," Kochersberger said.

As America is in the middle of an unprecedented business formation boom, it faces a potential surge in business disputes. A record 5.5 million new business applications were filed in the United States in 2023, the highest number ever recorded in a single year, according to the most recent statistics available from the U.S. Small Business Administration (SBA). Among them, limited liability companies (LLCs) have emerged as the dominant business entity of choice.

In New Mexico, more than half of all new business formations are LLCs, according to smallbizstatistics.com. In fact, our low $50 registration fee, minimal compliance requirements, and privacy-friendly laws that allow owners to keep their identities out of public filings make us one of the best states in which to form an LLC.

However, attorneys who handle both business formation and the litigation that can follow say the same tide creating opportunity is also generating a predictable wave of costly court disputes — most of them avoidable with proper planning.

The culprit, more often than not, is a missing or poorly written operating agreement. This is the foundational document that governs how a business runs, how decisions get made and what happens when partners don't see eye to eye anymore.

More than a formality

The operating agreement — also called bylaws in a corporation or a partnership agreement in a general partnership — is what defines the working relationship between owners. It spells out profit distribution, decision-making authority, capital contributions and, critically, what happens when circumstances change.

According to Kochersberger, circumstances always change.

For example, what happens if one partner wants to leave the business? Do the partners suddenly find themselves in business with a bankruptcy court if their company files for bankruptcy? If a member dies unexpectedly, does their spouse automatically become a co-owner? When the company needs capital, who is personally responsible?

These are the kinds of questions most business partners never think to ask when they're launching with all that excitement and goodwill. That's precisely the problem. Those who skip the operating agreement — or download a generic template online — often discover gaps only after a dispute has started. 

"It's difficult for somebody who's not a lawyer to be familiar with the type of things that could happen," Kochersberger said. "You just don't think of it. But lawyers do."

The most common dispute he sees involves a member leaving the business and the ugly fight that follows over what their ownership stake is worth. Kochersberger is currently litigating a case involving an operating agreement that didn't even address whether a departing member was entitled to compensation at all. That single omission has cost those business owners far more than any well-drafted agreement ever would have.

According to the U.S. Bureau of Labor Statistics, nearly half of all new businesses fail within five years. The legal fallout from poorly documented partnerships can accelerate that failure or extend it into years of litigation.

A litigation perspective changes everything

Because Business Law Southwest has a significant litigation practice alongside its transactional work, its attorneys have front-row seats to the real-world consequences of vague language, missing provisions and agreements that fail to anticipate the unexpected. That feedback directly shapes the agreements they draft. 

"A firm that actually litigates the fallout from operating agreements has particular insight into how problematic things can become if they're not written clearly — or at all," Kochersberger said.

Business partnerships built on optimism alone are fragile. The ones built on clear, comprehensive documentation are far more likely to survive the inevitable pressures of growth, change and conflict. For New Mexico businesses, getting that foundation right early and with experienced legal guidance may be the most important investment they ever make.

"I know it's hard, and everything seems expensive when you're forming a business. You have lots of things to think about," Kochersberger said. "But there's a tremendous likelihood that you'll regret it if you don't do it at the beginning."