It’s exciting pursuing a business idea with a friend, a family member, or even a former coworker. The creative sparks fly as you bat potential plans back and forth. And that excitement continues as you form your LLC and begin to put the wheels in motion to launch your business. However, there’s risk, too. Even when you have an LLC, you may still face ruinous legal fees from disputes that arise in your business if you don’t have an operating agreement. That’s why if you plan to go into business with anyone who isn’t your spouse — or even to accept a business investment from someone who isn’t your spouse — you need to be sure that your LLC has an operating agreement.
What Is An Operating Agreement?
An operating agreement is a non-public document that is incredibly important when going into business with another person. It outlines the financial and operating parameters of the business, as well as each partner’s responsibility within the business. The operating agreement may clarify:
- Who are the members of the LLC
- What are each member’s duties
- The percentage of ownership of each member
- How decisions will be made
- Who can bind the company to obligations
- How are profits divided
- How sales of ownership will occur
- How often meetings will be held
- What happens when a member dies
- How are disputes resolved
- How long the company will be in operation or at what point it should be dissolved
Having all of these details outlined in a signed, binding document can help you resolve and prevent disputes with partners. If a member fails to perform what was agreed upon in the operating agreement, their signature on the document will allow you to take action. In addition, many lending institutions and investors will ask for an operating agreement before agreeing to invest or offer you a business loan.
How An Operating Agreement Can Protect You From Liability
There is always a risk in going into business with someone — especially someone who isn’t your spouse. An operating agreement can help to mitigate that risk. If your business runs into trouble, and one of your partners tries to hold you liable for more than was your responsibility, your operating agreement will provide you with legal standing for your position. Your operating agreement lays out exactly what your liability and responsibilities are from the beginning.
An operating agreement can also help you hold a partner to their responsibilities and liabilities, rather than having that fall onto you by default. If your partner does not keep their end of the operating agreement, you are able to take action against them and hold them to the operating agreement.
Drafting an Operating Agreement
Like any legally binding documents, drafting an operating agreement should be done with precision in a comprehensive manner. It’s best to have a Garcia-Zamor attorney draft it for you. If your partner’s attorney drafts the operating agreement, you should at the very least have a Garcia-Zamor attorney look over the operating agreement and make proposed changes where necessary. This will help to ensure that the operating agreement is fair to you and that you aren’t tripped up on any hidden clauses later.
Garcia-Zamor has over two decades of combined experience helping business owners protect their intellectual property before the US Patent and Trademark Office (USPTO) to maximize patent, trademark, and copyright protection. The Garcia-Zamor team also protects business through carefully prepared contracts, forming business entities, and securing title to valuable assets so that they can help you through all the complex twists and turns of your business. Contact us today to learn more about how we can help you draft your LLC operating agreement.