You and your BFF have an understanding. You think alike and you’ve decided to go into business together. Everything is informal because you and your BFF do not stand on ceremony. There’s no operating agreement, no bylaws, or buy/sell agreement. You’re just two guys who like to work together building a dream. At least until you start making tons of money or the business hits a snag. Then like a bad marriage, your business partner/BFF now becomes someone you hardly know. The business you’ve sacrificed to build is in jeopardy; your friendship in taters and you don’t know your rights as related to the company and its profits.
As with most things in life, prevention is better than the cure. You and you’re BFF should have put your business plan and structure to pen. Everything related to the operation of the business, the sharing of the expenses and profits, and the capital contribution should have been spelled out in form of an Operating Agreement for your company. But you did not do that and now your BFF has taken company monies and disappeared to the Salvador, Bahia. Here are five (5) reasons why an Operating Agreement could have prevented the looming disaster in going to business with your best buddy.
Is the Operating Agreement a Legal Requirement?
Most states don’t require an LLC to have an operating agreement. Of the states that do, some require the operating agreement to be written while others permit oral agreements. No state requires an LLC to file an operating agreement with the Secretary of State; instead, the operating agreement is kept with other business records. No matter what state you’re in, however, it’s always a good idea to create a formal, written operating agreement. Here’s why:
REASON 1 – Avoid State-Imposed Default Rules
Without an operating agreement in place, your LLC is bound by the default rules of your state. Most state laws governing LLCs allow the default rules to be overwritten in the LLC’s operating agreement.
REASON 2 – Maintain Control
As the business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business development opportunities. An operating agreement can define the manager role—designating the authority and compensation and what happens if the manager leaves or competes with the company.
REASON 3 – Staying in Your Lane
An operating agreement delineates the responsibilities of the Members and Managers. An operating agreement also ensures the members are informed regarding the finances of the company. Oftentimes, members of an LLC are forced to litigate because there are misunderstandings of the roles of the members, managers, and the finances of the company. Our law firm has successfully litigated such LLC member conflicts and recognize that much of the dispute could have been prevented with a well-drafted operating agreement.
REASON 4 – Clarify Succession
An operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down.
REASON 5 – Scalability
Successful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement, the LLC will be better positioned in the investment negotiations.
Let’s Continue this Conversation
The operating agreement puts you in the driver’s seat and enables the LLC to perform its main task—to limit liability. If you have an operating agreement in place, we’d be happy to review the agreement, as well as your business, needs to ensure the operating agreement and LLC are in sync. Call us today (888) 450-7999, or email us at firstname.lastname@example.org