Creating an operating agreement is an important step in the early stages of entrepreneurship because it covers everything that is significant in your business: descriptive overview, how decisions are executed, and the why. These are not always done for start-ups, however it may be one of the most important documents you will complete for your new business. It is your business plan that will also legally protect you in liability cases.
Rights as an Owner
Sole owners should have an agreement written up for potential personal liability issues. Also, if you plan to expand your business and add other members to your LLC, the document will layout a process that follows the plan.
Multiple owners have the opportunity to make better use of an operating agreement because it will address the financial percentages, responsibilities, and equity. Putting these on paper is an intimidating venture, however it is one of the most important steps that you can make as business owners.
Operating Agreement & Liability
Operating agreements provide legal separation of the LLC as an entity and your personal matters. This is important for any court hearings you may be in, because an operating agreement provides evidence that your business is an LLC. Without it, a judge may rule that your business activities are only a sole proprietorship or partnership, leaving you at risk for being personally responsible for financial liability.
Defining the Internal Communication
If there are multiple partners in your LLC, an operating agreement will distinguish how voting is performed. Decisions will need to be made, and members should agree upon whether votes are weighted based on investment or a one-to-one per member. This is especially important in Minnesota. In line with voting, how disagreement is handled is an important aspect to document. Establishing a plan for detailing the disagreement is necessary in the event an outside perspective needs to be brought in.
Default & Distinctive Rules
The government has default rules that are automatically placed on your LLC when it is formed. However you have the option to create your own specific rules that would most likely be applied to profits and losses.
Government standards have been established so that all profits and losses are shared equitably among the members of an LLC. This is not a required rule, so you have the option to change the profit sharing based on commitment and contributions for individual members.
The operating agreement can also have a “special allocation” section for non-proportional distributions. This is meant for members that do not want to distribute any financial interests with their membership. This would be specified for members that have specific interests in their taxes.
How to Create an Operating Agreement
When you are ready to create an operating agreement there are a few places to begin. Have a discussion with your partners about voting, financial sharing, and responsibilities that everyone prefers. When you are with everyone, explicate how memberships will be added or sold.
Once everything has been finalized on your end, go to a lawyer to finalize the details and listen to their advice. Have everyone present here so all potential liabilities will be covered.