Understanding the most essential elements of an operating agreement is vital if you are thinking about starting your own company, as it will help you make sure you know how your agreement works and how these essential elements can protect not only your business and your business partners but also you individually.
The Basics – What Is an Operating Agreement?
In Florida, the LLC structure is one of the most popular business structures due to its tax benefits, its limited liability protection, and how relatively easy it is to start an LLC. However, while starting an LLC in Florida can be easy, operating one can be tricky. This is why having a comprehensive operating agreement is vital.
An operating agreement is a document that, essentially, outlines the manner in which you will operate your company. In it, you address how you intend to run the business and agree to run it that way. From financial goals to voting rights, a company’s operating agreement typically covers every aspect related to its operations.
Drafting an Operating Agreement – Why You Need Help
Drafting an LLC’s operating agreement can be tricky, as it is incredibly easy to leave out important components, which can result in problems down the road. This is why, when drafting an operating agreement, you should work with an experienced business lawyer. Drafting it without help can be the biggest mistake you ever make.
However, that does not mean you should not do your homework. As the owner of an LLC, you should know how your operating agreement works. Why? Because an operating agreement is, essentially, a shield, and if you are an inexperienced warrior who does not know how a shield works, you might end up wearing it as a hat, and that would not be very useful on the battlefield.
In other words, your operating agreement will not protect you on its own; you need to know how to use it correctly to take advantage of every single one of its provisions.
The Most Essential Elements of an Operating Agreement
One of the most essential elements of an operating agreement is ownership. An LLC’s operating agreement must clearly identify the owners of the company and, most importantly, how much of the company each of them owns and whether the ownership percentages can change (and if so, under what circumstances that can happen).
When it comes to managing an LLC, there are two options: the members can either choose to manage their company themselves or hire someone else – usually someone that is more experienced – to manage the business for them. This choice should be clearly stated in the operating agreement, and it should include specific details about the way the management structure will work.
If the owners will manage the company, will there be a main manager? If they will hire a manager, how will they choose the right person? What will the hiring process be like? Will each of the different departments of the company have a different manager? These, of course, are only some of the many questions your operating agreement should answer.
The operating agreement of an LLC must explicitly state how the owners of the company have chosen to be taxed as well as how they plan to run their business from a financial point of view. In other words, it should state how they plan to make money and how they plan to divide the money the business makes among the owners.
Running a business involves making hundreds of decisions almost every day. However, some decisions are more important than others. Important decisions – the ones that have a direct impact on the future of a business – need to be made carefully.
How will you and your partners make these decisions? If you and your partners will make important decisions by voting, who will have voting rights? If, for example, two owners have the same voting power, what happens when there is a tie? Will important decisions require a majority vote or a unanimous vote?
Ownership Transfer and Buyout
If one of your business partners wants to leave the business, how can they exit? Can they simply sell their ownership share to someone? Do they need the other owners’ approval? Do they need to offer to sell their share to the other owners first? If one of the owners dies, will the surviving owners split the decedent’s share equally? Will they sell it?
Unfortunately, one of the things you need to consider when starting a business is how you will end it. Your operating agreement should specify how your LLC should be dissolved if you and the other owners decide to do so in the future.
Nothing lasts forever, so you need to make sure you have a plan in case you need it. If at some point in the future you and your partners decide to close the business, the steps you should take to do so should be included in your operating agreement.
Drafting an Operating Agreement? I Can Help You
My long list of satisfied clients speaks for itself. If you need an operating agreement or any other type of contract for your company, I can create it and make sure it is bulletproof. If you already have an agreement but are not sure it is solid, I can review it and make any necessary modifications. A poorly drafted operating agreement can send you directly to a courtroom. I can prevent that from happening.