When starting a new business with one or more partners, it is essential to have a written business operating agreement that outlines the roles and responsibilities of each member, the distribution of profits and losses, decision-making procedures, and other important aspects of the business.
While annoying to set these things up on day 1 it will help avoid a lot of issues down the road. Especially if you’re in a partnership. Clarity in your operating agreement is crucial.
Here is a guide on how to write an operating agreement for a new business.
- Start with the basics Begin by identifying the business’s legal name, the business’s purpose, and the state in which the business is registered. Then, list the names and contact information of all the members and their initial contributions, such as cash, property, or services.
- Define the ownership structure Next, outline the ownership structure of the business. If it is a partnership, state the percentage of ownership for each member. If it is a limited liability company (LLC), explain the number of membership units owned by each member. Make sure to specify the voting rights of each member and how decisions will be made.
- Outline the management structure Describe the management structure of the business. Who will manage the day-to-day operations of the business, and how will decisions be made? If the business is an LLC, specify whether it will be member-managed or manager-managed.
- Detail financial matters Describe how profits and losses will be distributed among members. If it is a partnership, describe the profit-sharing ratio. If it is an LLC, explain how profits will be distributed based on the members’ ownership percentage. Also, include how capital contributions will be made and whether members can withdraw their contributions.
- Address changes to ownership Include provisions for changes in ownership, such as what happens if a member wants to leave the business or if a new member wants to join. Specify how a member can sell their ownership interest and at what price. You should also include provisions for the death or disability of a member.
- Specify how disputes will be resolved Include a provision for resolving disputes between members. This can be done through mediation, arbitration, or litigation. Be sure to specify the process for resolving disputes and the party responsible for paying any associated costs.
- Include any necessary legal provisions Finally, include any legal provisions required by your state, such as a provision for dissolution or any other provisions necessary to comply with state law.
Writing an operating agreement is an essential part of starting a new business.
It is a legal document that outlines the terms of the business and helps prevent disputes between members.
Follow these steps to create an operating agreement that meets the needs of your new business. It is recommended that you seek legal advice from an attorney familiar with your state’s laws before finalizing the operating agreement.
