Establishing a new business is a strategic and intentional process. In order to be successful, the operational responsibilities of the business shouldn’t be undermined by the enthusiasm of starting a new company. By this, we mean having a solid foundation for how your business is run will not only set you up for future success but also save you from potential issues in the long-run.
There are many administrative and operational steps to consider before officially establishing a business. Some of these steps are mandatory like filing for specific business licenses but others are optional. The requirement of an operating agreement depends on the state in which the business was formed. In fact, many states do not require an operating agreement at all. Although it may not be mandatory, we still highly recommend establishing an operating agreement for several reasons.
Read on to learn how business operating agreements can save you a lot of future headaches––from partnership disputes to financial disagreements––and how a defense attorney can help if you’ve exhausted all your options.
What is a business operating agreement?
We’ve mentioned how imperative it is to establish a business operating agreement, but what exactly is it? A business operating agreement is a legally binding document that outlines the terms of your business and governs the internal operations of your business according to the agreements of all owners. This can include information such as the organizational structure of your business, who has management and voting powers, how capital contributions are set forth, how profits will be distributed, any membership changes, and the dissolution of the business. This isn’t an exhaustive list of what can be included in an operating agreement and many businesses work with an attorney to have a tailored document that outlines specific regulations and provisions relevant to their company.
The primary purpose of an operating agreement is to protect you and your business. It especially gives members protection from personal liability to the limited liability status of a company. Because the operating agreement is a signed contract between co-owners outlining financial and functional decisions including rules, regulations and provisions, it can help safeguard you and your business from any future disagreements and conflicts that may occur between members. It must be signed in order to be legal, and an attorney can help you draft a document with language that correctly represents what you need.
Although operating agreements are a legally binding document, they do not need to be publicly reported. This means you can file it away safely without ever having to show the IRS or the state. You can simply reference your business operating agreement when you have questions or conflicts regarding the legalities of how your business should run.
Why should I have an operating agreement?
As we mentioned, the requirement of an operating agreement depends on the state in which it was formed. Even though most states do not require a written document we still highly recommend having one for several reasons.
Below are some reasons why you might consider drafting up an operating agreement before you establish your business:
- To protect the business’s limited liability status. Operating agreements give members protection from personal liability to the LLC.
- To solidify verbal agreements. By clarifying the operational conditions in writing, operational agreements help prevent misunderstanding or miscommunication between members. Even if you and your co-owners orally agree on terms, you’ll have a physical document to refer to in the event of any conflict.
- To protect your agreement in the eyes of your state. Without an official operating agreement, state law governs the terms of your business. This means that each state’s default rules apply to businesses that do not have a signed operating agreement.
Like in life, business disagreements are bound to occur. It’s not a matter of if but rather when conflicts will happen. Are you having disputes with your business partner? Are you looking to terminate your business? Whether your business partner is refusing to pay you your share of the business when the company is terminated or you’re looking to add a new member to the business, you can always refer to your business operating agreement for guidance.
If any misunderstandings come up between members of your company, operating agreements act as an official contract superseding default state law. In addition, as your business needs shift, your operating agreement can be updated and changed according to your requirements. We suggest working with an attorney to make any changes in your document, making sure the date of changes is documented and all members agree to the updates.
Legal resources for business disputes: we’re here to help
Conflict, disputes, and transitions in business can be complicated, whether you’re changing members or terminating the business. Working with our attorneys at the Law Offices of Robert J. DeGroot can help ensure your internal business operations go as smoothly as possible.
If you are struggling with a business dispute or conflict, reach out to our attorneys at the Law Offices of Robert J. DeGroot today.
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