If you’re a business owner, you’ve put in countless hours into building up your business and making it profitable. However, you must ensure that you have a comprehensive operating agreement because it is one of the best ways to protect your business from costly disputes to help your business stays afloat.
Basics of an Operating Agreement
An operating agreement is a document that contains many pieces of critical information regarding your business specifically your limited liability company (bylaws are the equivalent document for a corporation). This agreement customarily outlines the essential functions of your business, as well as basic information regarding its ownership structure, term, location, members, responsibilities of members, distribution of profits, distribution of losses, voting rights, and so on. In other words, an operating agreement is your company’s playbook and/or foundation.
A detailed operating agreement is a powerful tool for preventing disputes. Typically, a company implements a generic (and/or irrelevant) operating agreement, typically found via the Internet, and then becomes financially successful. Unfortunately, said success may cause disputes to arise regarding one or more aspects of the company amongst the LLC members. However, if the operating agreement can’t be used to resolve the dispute, then the ensuing litigation can oftentimes lead to the dissolution of the company.
As mentioned, operating agreements contain detailed information on a variety of topics: management of the company, defining certain terminology, decision making, and so forth. Therefore, if there is room for disagreement on certain aspects of the business, then it is easy to understand how disputes can arise namely if a member(s) exploits any vague terms of an operating agreement. Fortunately, a comprehensive operating agreement helps to prevent this from happening. If your company has already started, then review your existing agreement to ensure that no changes are needed. Developing a sound operating agreement will prevent costly litigation by addressing disputes before they arise.