What Does an Operating Agreement State

When starting a business, it is important to establish clear guidelines and expectations for how the company will operate. One way to do this is by creating an operating agreement. This legal document outlines the structure, management, and ownership of the business, and lists the rights and responsibilities of each member involved. In this article, we will go over the key components that an operating agreement should include.

Purpose of the Agreement

The first section of an operating agreement should state its purpose. This may include an overview of the company`s goals, the roles of the parties involved, and any other relevant information. It should also identify the type of entity the business is registered as, whether it`s a limited liability company (LLC), corporation, partnership, or another type of entity.

Ownership and Management

Next, the operating agreement should detail the ownership structure of the company and the percentages of ownership held by each member. It should also identify who will be responsible for managing the daily affairs of the business, and how decisions will be made and carried out. If the business is an LLC, the operating agreement should specify if it will be member-managed or manager-managed.

Capital Contributions and Distributions

An operating agreement should also address the capital contributions made by each member. This may include initial investments, additional funding, and any other contributions made during the life of the business. It should also identify how profits and losses will be distributed among the members, and how any money left over after expenses will be handled.

Rights and Obligations

Each member`s rights and obligations should be clearly defined in the operating agreement. For example, it should outline any restrictions on the transfer of ownership interests, as well as any buyout procedures in the case of a member leaving. It should also detail the duties and responsibilities of each member, and any consequences for failure to meet these obligations.

Dispute Resolution

Inevitably, issues may arise between members of a business that can`t be resolved through informal conversations. The operating agreement should specify how disputes will be handled, whether through mediation, arbitration, or another means.

Amendments and Termination

Finally, the operating agreement should address how it can be amended or terminated. This may require a certain number of votes from the members, or a specific procedure to be followed. It should also outline the process for dissolving the company, including the distribution of assets and liabilities.

In conclusion, an operating agreement is an essential document for any business, as it outlines the structure, management, and ownership of the company, among other important details. By ensuring that all members are on the same page and have a clear understanding of their role in the organization, an operating agreement can help prevent misunderstandings and conflicts down the road.