When setting up a business, it is important for business owners to set up an operating agreement and to know how to do that. An operating agreement is a document that outlines how financial and functional decisions for the business will be made including the rules, regulations and provisions of the business. There are a variety of reasons to have an operating agreement and know what to include in it.
What to include in an operating agreement
Operating agreements are important in many situations, including for partnerships and Limited Liability Companies (LLCs). In their operating agreement, business owners should consider including:
- The percentage of each member’s ownership interest;
- The voting rights and responsibilities of the members;
- The power and duties of the members and managers of the business;
- The distribution of the profits and losses of the business;
- The logistics of meetings of the members; and
- Buy-out and sell-out rules for the business.
The purpose of an operating agreement
The overall purpose of an operating agreement is to govern the internal operations of the business in a way that suits the specific needs of the business owners. The operating agreement is binding once it is signed by the members.
Having an operating agreement can both protect the interests of the members of the business and ensure legal requirements are met. The requirement to have an operating agreement can vary by state which is why business owners should be familiar with the requirements in their state. Business law can help business owners develop an operating agreement that meets their needs and is in compliance with the laws and requirements of their state.