An Operating Agreement is a contract agreed to among the members of an LLC that lays out the rules for how the business is going to operate, how membership interests may be transferred, and how members can protect themselves. Operating Agreements are not required under state law, but here are four reasons why we recommend them to our clients in any multi-member LLC scenario.
- Manage Growth. An operating agreement can anticipate for the future growth and structure of your business with enough flexibility to permit it to happen without changing the management or voting structure. Importantly, if your business needs an infusion of capital someday, then the founding Members can agree now on the terms that would apply to future investors in the business.
- Clarify Management Expectations. The operating agreement can clarify who is in charge of running the business, and for handling issues such as accounting, allocations of profit and loss, dispute resolution, signing contracts, and the many other issues to ensure that every participant understands their role and who is doing what.
- Disagreements. Everything seems great today, but at some point, you will have disagreements with your business partner(s). An operating agreement can set forth how disagreements between and among members will be resolved. Setting these rules now can save the business a lot of time, energy, and stress down the road.
- Death of a Member. It is wise to consider what would happen if a Member dies. You probably did not enter into business with the expectation that your partner’s spouse would someday be your business partner. Nor would you want to continue to pay your partner’s estate for many years if he/she is no longer participating in the business. You can address the mechanics of these issues in advance in an operating agreement.
If you have any further questions on drafting an operating agreement, or with any other matters related to business or estate planning, please contact us at email@example.com or 860.670.3535.