How to Create a Solid Operating Agreement for Your Business

Your startup is up and running, but you have a million things to do before you can truly get off the ground. Considering the time and effort needed when working for yourself, it’s easy to overlook the creation of an official operating agreement—especially when the State of Florida doesn’t require it for all business entities.

Unfortunately, overlooking this simple step can cause delays or infighting that leads to the breakup of the business before you have a chance to turn a profit. No matter what form your business takes, it needs a comprehensive operating agreement that lets everyone know where they stand.

What Provisions Do I Need in My Operating Agreement?

Your operating agreement outlines the structure, rules, and day-to-day functions of your business. It is essentially a contract between you and the other members of your LLC, partnership, or corporation, detailing the rights and duties of members and how decisions will be made.

Without this vital document, you and your partners could face many unpleasant surprises after a business emergency, such as:

  • Following the state’s rules instead of your own. If you forego the creation of an operating agreement, your LLC is bound by the language in your state’s LLC statute (for us, this is Chapter 605 of the Florida Statutes). Since these are generic rules that are intended to apply to a wide variety of businesses, they may not be the optimal guidelines to benefit your specific company.
  • Misunderstandings. If your agreement hasn’t been recorded in writing, different members may have a different understanding of their roles and responsibilities. Your operating agreement should be in writing and use clear and direct language that leaves no room for multiple interpretations.
  • Losing your personal assets. An operating agreement is vital for establishing your business entity status, protecting your business partners from your personal debts. For example, if you don’t have an operating agreement and your spouse files for divorce, the court may include assets from the business as part of the settlement.
  • Accusations of mismanagement. The agreement should contain financial details regarding the contributions and dividends of each member, how accounting will be done, and the fiduciary duties of the members.
  • An uncertain future. There should be a clear protocol for what will happen if a member wants to leave and what will happen to the remaining members after someone’s departure. State law provides that all members have the option to sell their interests in an LLC at fair value under certain circumstances. However, your operating agreement may stipulate when members can be removed, the minimum members needed for the LLC to remain intact, and which events trigger the dissolution of the company.
  • Litigation. There must be a specific plan in place for what will happen if members are not meeting deadlines, failing in their duties, or object to one another’s actions. If not, members may be quick to file lawsuits against one another or the business itself, taking you and the other members down a long and expensive road to litigation. An operating agreement cannot bar members from taking legal action, but it can require mediation and outline strategies for conflict resolution.
  • Conflicts after your passing. If your business has taken the form of an LLC, you should know that these entities are generally not survived by a member’s heirs. If you were to pass away, what would happen to your membership interests? Would your heirs see any profits, or would assets be distributed among the remaining members? If you have a family business, you may want to form a corporation for the flexibility it offers when transferring shares.

To avoid any conflicts, these agreements should be created and signed by all parties as soon as the company is launched. As your trusted advisor, we can advise you on the entity structure that’s best for your business, as well as draft entity agreements to ensure maximum protection for you and your business.

Let Us Walk You Through Life’s Changes

At Yolofsky Law, we don’t just draft documents. Our corporate and business law team can help you make informed and empowered decisions about life and death, both for yourself and the people you love. As your Personal Family Lawyer®, we can help you articulate your wishes and legally protect your loved ones for years to come. Give us a call today to discuss your options.

Related Links:

What Is Succession Planning for Entrepreneurs?

The Importance of Building Company Culture in Your Business

Starting a New Business? Follow This 8 Point Plan for Success