Operating Agreement: Advantages and Inclusions

One of the considerations in forming a business is the preparation of operating agreement. Operating agreement preparation helps structure financial responsibility as well as working relationships that best fit a business type.

In drafting an operating agreement, terms and conditions beneficial to all business owners must be included. The agreement must be prepared in a way that it covers all important aspects of the business. Both economic and non-economic issues must be clearly delineated to prevent future or potential lawsuits.

Although making an operating agreement is not required in most states, having one is a good business step. Moreover, courts tend to uphold or favor the terms embodied in the agreement especially on limited liability. In fact, the existence of an operation agreement overrides the laws on limited liability companies.

In most states for instance, the default rule is equal division of profits and losses. However, if an operating agreement exists then the profits and losses will be divided pursuant to such agreement.

Operating Agreement Inclusions

To prevent future conflicts, relationships between and among business owners must be defined in the operating agreement. Consequently, a good operating agreement is advantageous.

An effective operating agreement must include the following:

•    Percentage of shares in the loss and profits
•    Rights and responsibilities in the business
•    Voting process on various issues
•    Treatment of distributive shares
•    Office management and operation
•    Settlement of disputes
•    Transferability of Members Interests
•    Termination, Dissolution and Winding up of Business

Operating agreement functions the same as that of company by-laws. As such, it is essential in defining or limiting the rights and obligations of the owners or members.

In today’s business uncertainty, it is better to prepare an operating agreement to make sure that when the company becomes unstable, liability may be enforced. When the person liable is clearly provided for in the agreement, lawsuits may be filed against the refusing party.

While online information is available, drafting an operation agreement is best done with the assistance of a business attorney.  By doing so, future or potential business conflicts or violations of business laws may be prevented.