An operating agreement is a document used to set the rules and structure for management, decision-making, dispute resolution, and dissolution of any corporate entity.[1] When do you need to use one? In some cases, you don’t have a choice. Certain states legally require an operating agreement if your company has multiple owners. Florida does not, however, and because of the investment in cost and time it may be tempting to skip the step and move on to running your new business.
One very important reason to create an operating agreement is to protect your limited liability. In the eyes of the courts, a formal document clearly establishes the rights and responsibilities of owners of the business. Besides having key definitions, your company can reap many benefits from an operating agreement.
Hope for the Best, Prepare for the Worst
The operating agreement is sometimes described as a prenuptial agreement between business owners. It is a disaster document. Like a newlywed couple, you probably don’t expect to have problems with your business partners—especially if you’re in business with a friend or relative. If all goes according to plan, problems will arise and you will negotiate through them and move forward. If it is impossible to move past a problem, that is when the operating agreement comes in to play. If you do take the time to create an operating agreement, particularly if you own the business with friends or family, you can establish procedures for solving problems and prevent a great deal of personal tension. If any future problems land you in court against a partner, you will be able to support your case by referencing a legitimate legal document.
Make Your Own Rules
Your state’s default LLC laws may not benefit your business as much as a customized set of rules in your operating agreement. You can create a set of rules that are tailored to the needs of your business. Your agreement may answer questions like:[2]
- How will you add new members to the team?
- How will you make major business decisions?
- How will you settle disputes?
- If you have a voting system, how will it work?
- How will you split profits?
- What happens if a member dies?
- What happens if a member chooses to leave?
- Will any of you ever have to contribute your own money to the business?
An operating agreement will provide your company with a codified set of rules, as well as a solid outline of your business vision and goals.
Avoid Misunderstandings
An operating agreement can provide a crystal-clear set of rules about the duties, responsibilities, and expectations for each partner. It can address questions like “What is my workload?” and “How do we distribute shares?” The agreement can help you avoid misunderstandings about finances, management, and other important matters. If one of your partners isn’t playing by the rules, you can always point to your operating agreement and remind everyone of their responsibilities. No one can feign ignorance when you have a binding legal document in hand.
A solid operating agreement can prepare your company for change and prevent challenges down the line. An attorney can tell you exactly what to include in your agreement to get the best possible legal protection. Call the dedicated lawyers at Muir & Associates to start drafting your agreement. We will make sure your company is poised for growth and success.
What is an Operating Agreement and when might I need one?
Other articles:
Prenuptial Agreements and Responsible Business Ownership
5 Common Ways Business Owners Expose Their Personal Assets to Liability
