Operating Agreement: What Is It? Do You Need One?

June 14, 2022

If you have an L.L.C., make sure that you have an Operating Agreement. These are the instructions by which the L.L.C. operates, and it’ll be required from time to time if you’re doing any financing or bank arrangements. They will request to see that document. So this is similar to a prenuptial agreement if you were married. And what you want to do in the L.L.C. agreement is specify what happens if.

Now, if you are a solopreneur, you probably don’t have much to do about this because you’re not going to sue yourself. However, you’ll still need an operating agreement for banking information. But an operating agreement is a must if you are operating a business with multiple people. One of the first things you need to decide is what happens if one of you wants out. Does the other have to buy the amount required to tell who is required to authorize someone to exit?

If you have more than two people, you may have to have a majority of the members agree to something. Also, what happens if someone dies? I have heard of many businesses that have failed and had tremendous troubles based on this one thing. If you’re going into business with someone you are not married to, you may be in business with their spouse, and that might not be your best business partner if that partner dies.

So please make sure you take some time to go through it. What happens if one of the partners dies? Is there an insurance policy that will pay out so the other partner can automatically buy out that partner? Do they have to offer it to someone else? What are the terms? Also, a couple of other things, what are the particular duties and restrictions of each partner? So is one partner going to be the money person and be in charge of all the banking relationships? Can both partners make loans for the business or sign contracts that combine the company? You’ll want to dive into the structure of your business and agree to that stuff up front.

Next up, voting rights. If there is a vote and you have multiple people involved, are they all weighted the same? In an L.L.C., you can have different structures where people have different voting rights. So perhaps you have five people in the business, two of which are silent partners who’ve invested money but don’t get involved in the daily decision-making. Do they have the same voting power leverage as somebody involved in putting sweat equity into the business? Those are things you need to decide.

Also, decide on your structure for tax purposes and meeting purposes. When will you meet, how often, and when will you have those meetings? If you have more than two partners, sometimes having meetings with many people can be a chore and a task, and you want to ensure everyone is fully involved. So decide on a kind of a rough schedule. It doesn’t have to be specific days of the year, but perhaps it’s in a certain month each year.

And lastly, what happens if you wanna sell the business, you just both want out or you wanna shut it down. How is that handled? If the business is operating at a loss or it needs money to pay off loans when it closes and it’s not successful, who puts that money in and how does it get divvied out? So there are a lot of decisions to be made. If you have an L.L.C., please, please, please do this before you begin operations.

Think through all of this, and get your prenup in place. Make sure that everybody is going into this with open eyes, knowing what happens in the event of any weird situation that could come up. Don’t wait until there’s a problem to try to resolve this. It won’t be resolved. And my last little tidbit of advice, I don’t recommend going into any business with another partner unless you plan to marry them. There are so many issues that can come about, and some partnerships are very successful, but many and in a lot of trouble due to disasters, broken friendships, and broken family relationships. So think long and hard to document everything to a T before going into business.

I’m Donna Bordeaux from Calculated Moves. Please follow us on Facebook, Instagram, and LinkedIn. Check out our blogs and our websites from the link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. To contact me, email me at donna@calculatedmoves.com.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA, as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.