Operating Agreement for Company: Why Every Business Needs One
When starting a new company, there are countless tasks and decisions that need to be made. One important decision is whether or not to create an operating agreement. An operating agreement is a legal document that outlines the ownership and management of a limited liability company (LLC). Despite being optional, having an operating agreement can bring many benefits and protect your business in the long run. In this article, we’ll explore why every business needs an operating agreement and what it should entail.
Importance of an Operating Agreement
An operating agreement is a crucial document that outlines how an LLC will be managed and operated. Without one, the LLC is governed by default state laws, which may not align with the LLC members` objectives and priorities. The operating agreement offers the flexibility to customize the LLC`s management structure, financial distribution, and decision-making process. It serves as a roadmap for the LLC`s operations and protects the members` interests in the event of disputes or unexpected events.
For example, imagine that you and your business partner started an LLC as equal owners. You both contribute equally to the business`s operations, but you have different ideas about how the business should be managed and distributed. Without an operating agreement, state law may dictate that assets and profits are split evenly between you and your partner, regardless of each person`s contributions. Alternatively, if one of you were to unexpectedly pass away, state law may dictate that the deceased person`s share of the business automatically goes to their next of kin, who may have little interest or knowledge in running the business. An operating agreement allows you to set guidelines for how the business is managed, how profits are allocated, and what happens in the event of unexpected circumstances.
What an Operating Agreement Should Include
An operating agreement can be tailored to fit the unique needs of your business. However, there are some key elements that should be included:
1. Business Ownership: This section outlines who the owners (also called members) of the LLC are, how much ownership each member has, and how new members can be added or existing members can leave.
2. Management Structure: This section defines how the LLC is managed, who makes decisions, and how much power each member has in decision-making. You can choose to have a single manager, a group of managers, or all members share power equally.
3. Financial Matters: This section outlines how profits and losses will be distributed among members, how the LLC will be funded, and what happens if additional funds are needed.
4. Dissolution: This section defines what happens if the LLC needs to be dissolved, whether voluntarily or involuntarily, and how assets will be distributed among members.
5. Other Provisions: This section can include any additional guidelines or rules that the LLC members agree upon, such as non-compete agreements, dispute resolution methods, or membership withdrawal procedures.
Conclusion
Every business, big or small, should have an operating agreement that reflects its unique needs and objectives. An operating agreement can prevent disputes, protect member interests, and ensure that the business runs smoothly in the long run. It is a legally binding document that is essential to the long-term success of an LLC. If you`re starting a new business, consider consulting a lawyer or legal expert to help you create an operating agreement that works for you.