Every business needs an Operating Agreement – but what does every Operating Agreement need? An Operating Agreement is a document that outlines the way a business will operate. It is created by the owners of the business to address the specific ways they intend to run the business. It covers everything from the financial purpose of the business to the voting rights that owners have. However, it is not an Owner’s Manual – it does not contain every single item an employee may wish to know.
If you are crafting an Operating Agreement, you need to make sure that it covers all of your essential bases. Here are our 6 essential components of an Operating Agreement:
Ownership. Simple and straightforward enough: who all owns the business and how much of it do they own? If ownership is divided (as it often is,) what is the basis for the percentage shares that everyone owns? Can that ownership change?
Management. Are the owners the managers? Is there more than one main manager? How are managers promoted or hired? Do different departments or sections of the company have different managers in charge?
Financial Structure. How will the company be taxed? What is their financial structure set in place? How do they intend to make money? Are all of the owners responsible for bringing in a certain share of profit, or is the full thing a divided type of commitment? What will the official type of the business be listed as?
Voting Rights. For important decisions impacting the future of the business, how will they be decided? If the answer is by voting, who all has voting rights? If you have two owners who have equal voting power, who will be the tie breaker? For more than two voters, do you need a majority or a unanimous vote?
Transfer and/or Buyout. If one of the owners wants out of the business, can they sell their share of it? Do they need to offer it to the other owners to buy before offering it to anyone else? If one owner dies, do the others all equally split their share? Do they sell it to someone else? What if they had interest in the name of the company?
Dissolution. It’s sad but true: nothing lasts forever. If the owners want to close the business, how do they even do that? Do they sell it to another? What happens to all of the physical property of the business? How are profits from those determined? How much notice is needed to dissolve?
An Operating Agreement may contain some self-explanatory content, but it is one of the most essential documents a business will ever make. If you are starting a new business, you need to have one, and you need to make sure it is correct. For help with your Operating Agreement, contracts, or any legal documents, contact Cueto Law Group today. From boardroom to courtroom, we’ve got you covered!