Topics to include when drafting an operating agreement
Operating agreements are a crucial part of any smooth operating LLC and should be crafted with much thought and a high level of detail. Operating agreements decide how a business will handle the many different situations that will arise during the span of the business. Not addressing some important issues that arise could potentially lead to the dissolution of the business. Here are some important tips to remember when drafting an operating agreement.
When business owners decide to form an LLC, they usually are required to register with the state they operate in and fill out an Articles of Organization. Some owners think that is enough for the business and do not draft an operating agreement. Other businesses that commonly omit operating agreements include single member LLC’s. The absence of an operating agreement is a costly mistake that all LLC’s should avoid. A thorough operating agreement should be put into place as soon as possible.
Not addressing how ownership changes will take place. Without addressing how new members are welcomed could lead to other owners potentially adding members without your consent. Also addressed should be how much ownership each member has and whether you plan to share equal ownership or not. Avoiding headaches like this are what leads to running a successful business.
One of the most important pieces to an operating agreement is laying out the groundwork for how decisions will be made. In the early stages of a business it is not uncommon for members to have equal voting rights. LLC’s that use this type of system allow each member, regardless of their percentage of ownership to have one vote. Other LLC’s may elect for more voting rights to owners with higher ownership. Not having a system in place can lead to issues when something needs to be voted on.
Another thing that needs to be addressed in an operating agreement is how the company will handle dissolution. This is probably the last thing on members minds when they begin running a business but it must be addressed to avoid potential issues. Without a process in place, members could dissolve the LLC without your consent.
Once established, many business owners neglect to update the operating agreement. It is important to keep your operating agreement up to date since it can decide everything from how issues will be resolved, to what should happen in the event an owner decides to withdraw from the business. Having a good operating agreement can bring peace of mind.