Six Tips for Writing an Operating Agreement for Your LLC
An operating agreement is a legal document that outlines the rights and responsibilities of members within an LLC. While not all states mandate operating agreements, they can still be helpful for businesses that need to borrow money. Here are some tips on how to write one.
1. Consider Using an Online Tool to Help
Instead of writing an operating agreement yourself, you can use online tools like Form Pros. Form Pros offer templates that users can fill in, making writing your operating agreement a simple task. You can also go to your state’s website to print out an official LLC form.
However, online tools are perfect if you need to add another section or write more information. Most state forms only give you limited space, which may prevent you from adding more members or other important details, and you can’t write in the margins on an official document.
2. Take Your Time With Ownership Percentage
The first section of an operating agreement asks you to determine the members in your LLC. It has to contain vital details, like their names, addresses, and titles, but ownership percentage is something you should pay attention to because it could determine your company's fate.
In most business agreements, the person with the largest company share gets to override decisions. If you’re the CEO, but another person has contributed significantly to the company, ask yourself if you can trust this person, as they may take control over your company.
3. Discuss Rights, Responsibilities, and Compensation
Your company will grow and change, but there’s an expectation that your LLC members will continue to be responsible for the same duties until a new document is signed. If a member isn’t comfortable with taking on certain tasks, don’t put these tasks next to a person's name.
Not only could it cause significant distress in your company, but any incorrect information could cause you legal difficulties or refusal to sign. To make the process as quick and painless as possible, discuss everyone's voting rights, daily duties, and pay before making the document.
4. Have an Action Plan for Joiners and Leavers
It isn’t uncommon for LLC members to leave immediately after signing an operating agreement, so have a plan in place that accounts for this phenomenon. You also need a plan for when a new member joins because a joiner may take a share of a person’s ownership percentage.
Most LLC owners will replace one person for another if someone leaves, making the swap effortless, but a joining member can make things more complicated. It’s essential to be as detailed as possible so other members aren’t blindsided or confused when the time comes.
5. Always Create a Dissolution Terms Section
Approximately 20% of businesses fail in the first year. We always want to think we won’t be a part of that percentage, but there’s a chance that by year two, your company won’t survive. There’s nothing wrong with preparing for the possibility of failure with dissolution terms.
Remember that your business (unless you’re a part of a single-member LLC) isn’t a one-man show. You need to protect yourself and your business partners in the event of a dissolution. That involves ensuring company debt is paid, and assets are divided fairly amongst the members.
6. Make a Severability Clause, Just in Case
A severability clause protects the terms of an agreement in case part of it is contested by state or federal law. Certain terms in your operating agreement can’t be upheld in a court, even if all members agree to the terms. A severability clause can still protect the rest of the contract.
Writing in a “Governing Law” section can be helpful if a member breaks one of your terms because it states what state law or jurisdiction the members must follow. You can also outline what the members should do during a breach of contract, like consult a mediator or a lawyer.