What Does an Operating Agreement Contain?
When starting a company, forming an LLC, or restructuring your existing business, it`s important to create a legally binding document called an operating agreement. This agreement outlines the ownership and management structure of the company to ensure all members are on the same page regarding the company`s operations. Here`s what you can expect to find in an operating agreement.
Definition of Terms
The first section of an operating agreement should define all the terms used in the document. It`s essential to establish clear definitions and avoid vague language to prevent misunderstandings among members.
The operating agreement should outline the ownership structure of the company, including the number of members, their contributions, and how profits and losses will be distributed. It should also clarify the percentage of ownership of each member.
An operating agreement outlines the management structure of the company and the roles and responsibilities of each member. It should specify who can make business decisions, hire employees, manage finances, and sign contracts.
The agreement should also outline the voting rights of members and specify how votes will be conducted. It should include details such as who can vote, when voting is required, and how votes will be counted.
An operating agreement should specify the capital contributions made by each member and the method for adding or withdrawing capital. It should also provide details on how to handle any additional contributions required when the company needs extra funding.
Profit and Loss Allocation
The operating agreement should outline how profits and losses will be allocated among members. It should include details such as the distribution method, frequency, and the percentage each member will receive.
Transfer of Ownership
The agreement should specify the process for transferring ownership in the company. It should outline the circumstances under which ownership can be transferred, and the process for doing so. It should also clarify whether the remaining members have the right of first refusal before any transfer occurs.
Finally, an operating agreement should outline the process for dissolving the company. It should specify which circumstances can lead to dissolution, the process for winding up the company`s affairs, and how to distribute any remaining assets among the members.
In conclusion, an operating agreement is a crucial document to ensure the smooth running of your business. It provides a clear structure for the company`s management, ownership, and decision-making processes. By including all the necessary legal details, you can avoid future misunderstandings and conflicts among members. Consult with a legal professional to help you draft an operating agreement that meets the needs of your company.