You decided to go into business with a family member or close friend. When starting out, you may not see the need to put to paper details such as how you split the profits and losses or how you will handle conflicts. However, as you get your business off the ground and begin to grow, having an operating agreement in place may help you prevent small issues from turning into major problems down the road.
A contract document, an operating agreement dictates terms for your business’s internal operations. Including the following details in your agreement may help you develop a business outline that serves your needs, and those of any others with whom you share ownership of your company.
Ownership Information
According to the U.S. Small Business Administration, operating agreements should include ownership information. To this end, such contracts should specify the percentage of each member’s ownership. They may also indicate how the owners or members of the business will distribute the company’s profits and losses.
Rights & Responsibilities
To help avoid misunderstandings and other such issues, you will want to incorporate the rights and responsibilities of the members and managers in your operating agreement. For instance, you may specify who has voting rights on financial and functional decisions. Operating agreements also often indicate the powers and duties that members or managers share, as well as the protocols for holding meetings.
Rules For Leaving
Operating agreements also typically outline the buyout and buy-sell rules for ownership shares. Additionally, you may include the procedures you intend to follow in the event of your or another owner’s death. For example, this may include dictating how the deceased’s interest will transfer to a beneficiary or heir.
Although not legally needed, creating an operating agreement before starting a business helps many LLC members avoid disputes that may derail their companies’ day-to-day functioning, as well as their futures.