Operating agreements are essential business documents that outline the operations of the business, including financial and functional rules and regulations. We’d like to help you define what should be in an operational agreement in this article and provide some clarity for you and your team regarding the importance of operating agreements.
What are the Important Provisions of an Operating Agreement?
- Manager authority/limitations
- Sets a clear stage for what each member/manager can and cannot do financially and operationally in the business.
- Tax matters
- Describes how owners will be taxed and whether the company will reimburse owners for tax as a result of their company interest
- Identifies how the company will be classified by the IRS.
- Ownership ledger
- A ledger that documents the name of each shareholder, ownership units (shares) held by each shareholder, and the amount of capital contributions for shares.
- Voting requirements/procedure
- Determines what constitutes a vote, who can vote, voting powers, matters to vote on, voting rules, etc.
- Distribution procedures
- Outlines the rules, frequency, amount, and share of capital distributions from company profits
- Procedures for adding/removing members
- Both voluntarily and involuntarily.
- Estate planning provisions
- How to handle ownership interest in the event of death or permanent disability of a member, divorce of a member, or retirement; this one should definitely be included in all operating agreements.
What are Some of the Pitfalls of Not Having an Operating Agreement?
- Divorce of an owner impacts the financial well-being of the business
- Disagreements amongst owners can damage the reputation and operations of a business
- Business is forced to adhere to state default rules in the absence of an operating agreement (more on state-specific considerations below.)
State-Specific and Other Consideration
Some states require every business to have an operating agreement by law. Those states include California, Delaware, Maine, Missouri, and New York. Although it is not a requirement in every state to legally have an operating agreement, it is highly recommended that your business have an attorney reviewed operating agreement for your business. A copy of the operating agreement should be kept along with all of the other core business documents, even if doesn’t need to be filed with the state.
Learn More About Operational Agreements
Do you have any questions about your existing Operational Agreements or need to put one together for your business? To schedule a free consultation to discuss how it impacts your business, please call 216-307-5590, or get in touch using our online intake form.
All the best,