Most small businesses are smartly forming limited liability companies to help shield the individual members from liability. With a solid business plan in place and the financial backing to get started, the business is off and running. The proper insurance is in place. But are the members fully protected?
An Operating Agreement is a vital tool for every limited liability company. It’s important to have a written document which memorializes the respective shares, voting rights, and distribution rights of each member. But a good Operating Agreement can do so much more. It can be customized to fit the needs of your particular company and the specific industry in which you work. Is there a specific member that is going to manage the day to day operations of the business or will that be a shared responsibility? Which of the members will have the authority to bind the company to long term contracts or substantial debt? Answer these questions and many more about the governance of your business through a well-drafted Operating Agreement.
Besides addressing the mechanics of the business, a good Operating Agreement can do so much more. What if a new member wants to buy into the business? That’s great but it potentially dilutes the shares of the existing members. Should the existing members have a right of first refusal so that they can maintain or even increase their respective interests? Is this the type of transaction that requires a unanimous vote? A good Operating Agreement will help navigate the company through these types of situations and more.
And then there’s the situations that no new business member wants to think about. The literal or figurative death of a business or one of its members. Our bet is that each member of your business has a will. Some of your members may even have a pre-nuptial agreement. Well, if you believe in the value of either of these documents, why wouldn’t you consider customizing your Operating Agreement to address similar situations for your business? Have you considered how the assets and liabilities of the business will be distributed if your business dies (i.e. it is forced to close its doors)? Have you considered how the business assets and liabilities will be divided if one of your partners divorces themselves from the business (i.e. abandons or leaves the business)? Have your wishes articulated in a well-drafted Operating Agreement. Like a will or pre-nuptial agreement, we hope you won’t need to use the Operating Agreement for these occasions but it’s a good feeling to know that it’s there for you just in case.
Be sure that a well-drafted Operating Agreement is part of your business tool box.
Written content provided by small business attorney, James (Jim) Ludwig