If you are ready to launch a new business, it’s natural to feel excited and a little apprehensive. Starting a business is no small matter—you’ve probably already put in considerable effort, time, and money to give your business the solid foundation it needs to grow and thrive. By now, you have likely chosen a business structure that best suits your needs. If you have decided to structure your business as a limited liability company (LLC), you should consider the importance of creating an operating agreement to clarify the owners’ roles and responsibilities, preserve your business’s limited liability status, and protect your business from potential legal disputes in the future. This post will explore the core components of an effective operating agreement to help you take the necessary steps to keep your business as safe and successful as possible.
Why Having an Operating Agreement Matters
Many people on the cusp of starting a new business venture have the intention of creating an operating agreement. Still, this step often gets lost in the shuffle of all the other tasks and responsibilities. Without an operating agreement in place, your business becomes subject to your state’s default rules. This may lead to additional difficulties should a dispute arise in the future. While it may be tempting to use a free, generic online template to create an operating agreement, these forms are often overly vague and leave your business—and the operators—vulnerable to legal issues and liability in the event of a dispute. Although establishing an operating agreement may seem like a mere formality, taking this step is one of the most strategic things you can do to ensure your business runs smoothly and that disputes are resolved favorably and efficiently.
Customize the Agreement to Suit Your Needs
There are many more exciting details to focus on when starting your new business, so it’s common for owners to rush through the process of drafting an operating agreement. Online tools make it easy to slap an operating agreement together without much thought. Unfortunately, relying on these tools can make it much harder to navigate disputes as they arise. When you take the time and effort to write a customized operating agreement that addresses the unique needs of your business, you can enjoy greater peace of mind and trust that this document will guide you through future disputes or issues that may crop up in the future. Below are some considerations you may wish to include in your operating agreement.
Address Percent of Ownership and Profit Distribution
Many LLCs begin by assigning each member a percentage of ownership proportional to the total funds they invested in the business. However, there are circumstances where one member may have invested less but is doing much more work than the others. Discuss how you will determine the percentage of ownership and include the details in your operating agreement. You should also use the ownership agreement to specify how the LLC will split the profits among the individual members.
Clarify Roles and Responsibilities
Although the founding members may think they will naturally figure out which person does what as the business grows, failing to specify each member’s role can spell trouble. Take the time to discuss and articulate the roles and responsibilities of each member and put this information into the operating agreement. If disagreements arise about a particular duty or member’s responsibilities, you can use the document to resolve the issue. It would be best if you also addressed how your LLC will make decisions (i.e., will a vote need to be a majority or unanimous to pass a resolution?). The more details you include up front, the more guidance you will have when an issue arises.
Guidelines For Dissolution
The last thing you want to think about when starting a new business is its failure. However, taking some time to walk through the process of closing the business is essential. Include clear instructions for how your business will handle the departure of a member and what steps you will take to dissolve the company should the unthinkable happen. You will be glad to have these guidelines in place to help you navigate any unforeseen challenges.
Giving Your Business a Bright Future
It’s helpful to think of your operating agreement as a living document. As your business grows, its needs may change. Be sure to tweak the operating agreement to address these new considerations. You should consider enlisting the guidance of a trusted and experienced business law attorney to help you create a customized operating agreement. A business lawyer understands how to put the necessary protections in place to give your business the strong foundation it needs to grow and prosper.
If you’re interested in discussing your business needs, call Judex Law LLC today at (303) 523-4022 to speak with a trusted and friendly business law attorney.