An Operating Agreement is a contract drafted, and agreed to, by the members of an LLC, and that lays out the rules for how the business is going to operate. Operating Agreements are not required, but we highly recommend them to our clients in any multi-member LLC scenario. Here are four reasons why.
- Death or Retirement of a Member. It is wise to consider what would happen if a Member dies or retires. 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.
- Transferability of Ownership Interests. Similar to the above concerns, it is likely important for you as a Member to understand the terms upon which you and your partners may sell or give away/bequeath ownership interests. Likewise, you probably want to protect yourself from a partner who may get divorced someday. The operating agreement can address and employ mechanisms such that you and your partners would have a right of first refusal and keep ownership restricted to people you know, like, and trust.
- Disagreements. Today, everyone is getting along, but at some point you will have disagreements with your business partner. 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, money, and stress down the road.
- Manage Growth and Expectations. 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. The operating agreement can also clarify who is in charge of running the business, and for handling issues such as accounting, allocations of profit and loss, and the many other issues business owners face every day.
For assistance with any legal needs related to your business or estate planning, contact Fournier Legal Services for a consultation at email@example.com or 860.670.3535.
Joseph E. Fournier is an Attorney and a CPA who has more than twenty years of experience in a variety of business legal matters, including start-ups and company formations, drafting shareholder and operating agreements, contracts, employment law, commercial litigation, tax planning and audit defense, and mergers and acquisitions (M&A). He also handles estate planning matters, such as business succession planning, wills, trusts, and probate.