The Importance of Operating Agreements

An operating agreement is one of a Limited Liability Company’s most important documents.  Although most states don’t legally require an operating agreement, all LLC’s should have one, particularly when there is more than one member.   Although different kinds of ventures will focus different topics in their agreements (LLC’s that own property vs. those that run a business for example) there are few key provisions that every operating agreement should cover.

First, you will want to cover the essential question of “who is in charge” and how decisions are made.  You may decide to have one general manager, or perhaps two co-managers or a committee.   Related to this issue is day-to-day management and authority over such things as hiring, firing, paying certain expenses and making other decisions.   

Secondly, how are profits and losses distributed?   According to your ownership interests or some different formula recognizing different resources each member may bring to the company.   Will the company make “guaranteed payments” of any kind?  These are like a salary and deducted from the profit of the company.   

Lastly, will there be any restrictions or rules around how members can either resign from the company, sell their interests, require the other members to buy them out or situations such as death, divorce or bankruptcy of the members?   These situations can all create difficult questions.   Sometimes members’ interests change, relationships sour and/or there are disagreements about how to run the company, invest resources or treat employees.   The death of a key member may mean that member’s spouse or child now is an owner.   It is important to discuss these matters and decide ahead of time how these situations will be handled and create a road-map to follow.

When you are excited about your new venture – thinking about and discussing these matters can seem difficult – but it is critical to be thoughtful and intentional in including these issues in a well-drafted operating agreement.

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