5 Tips On How To Draft An Operating Agreement To Protect Your Business Partnership

​An operating agreement is a legal document issued by the limited liability companies (LLC) outlining the manner in which it operates. 

What this implies is that an operating agreement will have all of the information on the financial rules of the company, roles of each of the founders, and ways in which they resolve disputes.

Unlike corporations that have corporate by-laws and articles of incorporation, limited liability companies have operating agreements, outlining the course of operations of the company. 

Not all states mandate LLC companies to have an operating agreement, yet it is recommended that every business must opt for an agreement to avoid issues in the future.

What Does Operating Agreements Have?

While the exact information added within the agreement may vary from company to company, the standard norms suggest the inclusion of:

The total members within the company.
The tax considerations.
Member investments.
Profit-sharing.
Structure of management.

In case the company has several members, the agreement is more like a binding contract between all.

Do You Need An Operating Agreement?

Having said the above, do you really need an operating agreement?

The answer to this is yes! Even though the law doesn't force you to have one, it is a good practice to have an operating agreement prepared for your limited liability company.

Having a written agreement outlines every detail of the arrangement and makes it clear to every member of the company. This ensures that there are no misunderstandings and everyone is on the same page.

The operating agreement provides more control over the business. It is noted that organizations that do not possess an agreement are judged based on state laws.

This might pose threat to the existence of the arrangement as few states render equal profits to all the members. Hence, it is best to have an operating agreement.

Also, an agreement preserves the limited liability aspect of the company. In case a company doesn't have an operating agreement, the owners of the same might be accountable for personal liability.

Tips For An Effective Operations Agreement

A document prepared without much attention would be as good as not having one. Keeping this in mind, we highlight five tips to draft your company's operating agreement effectively.

Purpose: To begin with, the operating agreement must specify the intent behind the creation of the company. What is it that the company seeks to achieve.

Contributions: Next comes, contributions. It is important to highlight what each owner is expected to contribute and under what circumstances.

Tax Considerations: The next thing to mention within the agreement is related to taxes. The agreement is expected to mention the terms of taxes. Meaning whether they wish to pay taxes as a partnership firm, a sole proprietorship or a corporate venture. Also, it will address how personal taxes will be paid and addressed.

Term Or Tenure: Conventionally, a limited liability company runs until it shuts down. However, at times organizations are set up for a specific purpose and for a significant period of time. Hence the need to mention the term of the company.

Management Terms: Lastly, specify whether the company would be member-managed or manager-managed In other words, this will address if the owners will partake directly in the management of the company or allows employees to do so.

Make sure you have all of the above-mentioned provisions within your company's operating agreement to be safe and secure.

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Yoel Molina, Esq. (AKA “Mo”)

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