When you form your new company as an LLC with one or more partners you really should have an “operating agreement.” The company’s operating agreement is an all-encompassing agreement over various aspects of your company’s operation, such management structure, contingencies in case of a member’s loss of life, and all the numerous aspects of how your company will be run. A similar document exists for those forming a corporation but is instead called a “shareholder agreement;” however, as we prefer that most new business be formed as LLC’s, in this video we’ll largely be discussing the nature of operating agreements.
- The state does not require any business to have a written operating agreement. There are default rules set by the state regarding how every LLC is operated. However, relying on these rules may not be in your best interests or the best interests of the company overall.
- Initially, when you and your partners decide to form a company, the preliminary discussions you share constitute a rough verbal operating agreement. This is one option to consider when starting your company together, since there is no substantial capital involved yet. The downside is that when the company requires a decision to be made, a verbal recollection of what you and your partner agreed to may not be good enough.
- Another cheap option is to utilize an online program that can help you and your partners create some kind of operating agreement. However, the downside for this option is that what you get may not be suitable for your needs, you might not be able to get answers to questions you need to properly customize it, and of course you won’t even know what you don’t know so you cannot ask.
- The best thing to do is to negotiate an operating agreement and write down the results. You all discuss the contents of the agreement, guided and mediated by a third party that is experienced in LLC operating agreements, such as a lawyer from a business-centric law firm like Argent Place Law.
- Your written operating agreement should cover all the aspects of the business that are important to you. A perfect example is what happens if one member becomes incapacitated, dies, or leaves the company. Such situations must be covered by stipulation in the agreement and can be with a “buy-sell” or a “transfer” agreement, which often takes up a large section of the overall operating agreement.
In the end, how you form your company’s operating agreement is relative to what you and your partners require at the time of your LLC’s inception. From our experience and knowledge with numerous businesses throughout the years, we at Argent Law understand that having a thorough and well-negotiated operating agreement is simply good business practice. It ensures a smooth track for your company’s operation, especially in case of emergencies.
Entrepreneurs are going to save the world, and Argent Place Law wants to help. That’s why we are a team of entrepreneur-lawyers serving Entrepreneurs just like you. Think how great it will be to have a legal team with entrepreneurial experience on your speed dial so you can call us up and say, “I’m bringing on a new partner, so I need an operating agreement that spells out how I can maintain control of the company but it is fair to my partner too.” Call Argent Place Law to find out.