If you are a business owner registered as an Limited Liability Company and you have a partner(s) your business should have an Operating Agreement prepared by an experienced attorney. Starting a business with partners is an exciting and often intimidating and scary time. Way to often a friends or colleagues start a business without the proper legal safeguards in place. It is important to draft an Operating Agreement when things are going well and everyone is getting along in case something happens that cause the relationship to go sour.
What is an Operating Agreement?
An Operating Agreement is a document that permits owners to establish the following:
- Who owns the business and in what amounts or percentages
- How profits and losses will be distributed
- How capital, or additional cash or resources, will be paid into the company
- Who gets to vote on management decisions and the number of votes necessary for a decision to be made
- How members/owners can be added or removed
- What happens if the company decides to dissolve and how the decision is made
- Who and how loans can be taken out by the company
- How and to whom a member can transfer their share
- Tax consequences of the business.
Important parts of an Operating Agreement:
The Operating Agreement should show who has an ownership interest in the business and set-up in what percentages the individuals own an interest. The Operating Agreement can also restrict a person’s ability to transfer there share or interest to another individual. For example, if Joe, Sally, and John decide to start a business together they most likely did so because each has a skill set that adds to the business and the three of them get along. What happens if Joe decides he doesn’t want to be involved in the business anymore and decides to transfer his share to Jack. Without an Operating Agreement there is no restriction on how and to whom Joe can transfer his share. This could leave Sally and John in a business with someone that they do not wish to be involved with. The Operating Agreement should also take into consideration how to remove a member that may not be towing the line. The Operating Agreement should also outline how and when money can be removed from the business to pay the owners. Again, it is important to consider these items and have an experienced attorney put them in writing when things are going well.
Can we change the Operating Agreement?
The Operating Agreement should outline when and by what vote the Operating Agreement can be amended or modified. As the business grows and becomes successful it is highly likely that the Operating Agreement will need to be changed.
What happens if we do not have an Operating Agreement?
If the business does not have an Operating Agreement and a problem arises between the members/owners this could result in litigation or court involvement. This can cost the business thousands and could even result in a Court ordered the business to be dissolved or closed and a liquidation of all assets. Spending time and money now to prepare an Operating Agreement can save the owners and the business thousands of dollars or more in the future and can help prevent the business being closed.
Any business with more than one owner should consult an experienced attorney that can discuss the specifics needs of the business and can help draft an Operating Agreement that can help protect the owners and the business.