Small Business

#

Intellectual Property

 May 26, 2022

5 Steps to Write an Operating Agreement

Female shoe business owner

As a business owner, it’s important to create a document that will serve as a list of rules by which your business will run. This is what an operating agreement is for. By creating an operating agreement, you’re crafting a document that states in no uncertain terms the rules and regulations associated with running your business, including the rights of additional partners and how to work with outside contractors.

Have you been wondering how to write an operating agreement? It seems like it should be pretty straightforward, but there are certain aspects you definitely want to include to ensure your business runs smoothly.

Follow these five steps to write an operating agreement:

Step 1: Decide the Parameters of Ownership

If your business has partners or you’re running an LLC that has board members, it’s essential to determine everyone’s titles and their percentage of ownership. This is important because each member is included in your business’s profits, losses and assets, and their responsibility—or benefit—in each of those categories is determined by their ownership percentage.

It’s a good idea to encourage your fellow partners, members or co-owners to work together on creating this part of the ownership agreement so that everyone is on the same page and feels that they’re being reasonably compensated.

Step 2: Determine Rights and Responsibilities

You, your partners and members will also want to have clear communication surrounding rights and responsibilities associated with the business. This covers everything from salaries to professional duties and role requirements to voting rights.

Think of this section as a companion piece to the ownership percentages. This section of the document clearly details each member or partner’s role in the company and how much say they have in business decisions that impact the company and other members.

Step 3: Outline the Rules for Joining or Leaving the Business

There may come a time when a partner or member decides they want to move on to other opportunities, so it’s essential to plan for that potential event even if it seems like it may never come to pass. There’s no way of knowing what might happen in the future, so being prepared is key.

In that same vein, you may bring on new partners or members down the line—which means it’s also important to create a plan in case new people come on board. You’ll want to detail how that will impact the current ownership structure, whether someone is joining or leaving, as well as outlining the onboarding or offboarding process, and what an entering or departing partner or manager is entitled to when they join or leave the business.

Step 4: Make a Plan for Dissolution

Let’s say you decide to close the business for any number of reasons. If you don’t have a dissolution plan, you could run into trouble with your fellow partners or members. Much like the other sections of the operating agreement, this section also outlines member or partner duties and responsibilities, but this time it’s specific to the closing of the company and determines who’s responsible for what, as well as how remaining debts and assets will be divided. You may want to outline whether or not members are allowed to launch similar businesses in the future.

Step 5: Add a Severability Provision

You definitely don’t want to forget this step. This section outlines how the operating agreement is protected if any aspect of it is considered in conflict with state or federal law, ensuring that the aspects that aren’t in conflict are still deemed enforceable. It’s a good idea to have a severability provision just in case you miss a detail that could cause undue issues for you and your members or partners down the road.

Write Your Operating Agreement With a Lawyer’s Guidance

Are you ready to create an operating agreement? LegalShield can help you with support from a partnering lawyer who can make the process easier and more efficient. A legal plan from LegalShield provides access to experienced lawyers at an affordable price, with consultation and assistance from a provider law firm.

Pre-Paid Legal Services, Inc. d/b/a LegalShield (“LegalShield”) provides access to legal services offered by a network of provider law firms to LegalShield members through membership-based participation. Specific limitations apply. See a plan contract for specific state of residence for complete terms, coverage, amounts, and conditions. The benefits described, including trial defense, are not available in all legal plans or in all states. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation, or legal advice (business consulting or business advice). This is meant to provide general information and is not intended to provide legal advice, render an opinion, or provide any specific recommendations. If you are a LegalShield member, please contact your provider law firm for legal advice or assistance.

 

Related Content

Top 10 Tips for Small Business Week 2022

Top 10 Tips for Small Business Week 2022

At LegalShield, we celebrate entrepreneurs every week, but we're particularly excited for Small Business Week 2022 from May 1-7. This year, the theme is Building a Better America through Entrepreneurship, in honor of the pivotal role small business owners have played...

DBA vs LLC—What’s the Difference?​

DBA vs LLC—What’s the Difference?

When starting a business, one of the first decisions you have to make is what type of entity to form. There are a few different types of business structures to choose from, but two common formaitons are the DBA and LLC. In this DBA vs LLC article, we will discuss the...