“Everyone listen up! I’m laying down some ground rules!” – words no child ever wanted to hear. Whether it was, “No running by the pool!” or “Quiet voices in the house!”, as a child, these rules were meant to be broken. However, as a business owner—not so much. When forming a business, specifically an LLC (limited liability company), establishing these ground rules and expectations is essential to becoming successful. Regulating and enforcing such matters as adding members, buy-sell of membership interests, insurance capitalization, and other matters should be placed into an operating agreement.
So, what is an operating agreement? Simply put, an operating agreement is an agreement among limited liability company (“LLC”) Members governing the LLC’s business, and Member’s financial and managerial rights and duties. An operating agreement is a business contract that explains the operations of the company, setting out all the terms and conditions agreed to by the founding member(s). When drafting this agreement, every possible outcome is considered to protect the owners in any given situation. The agreement covers day-to-day operations, as well as the “what ifs” and special circumstances, such as keyman life insurance. Each company and its members are different. As such, no given agreement is the same and can be drafted specifically to your needs and expectations to avoid future headaches.
Your businesses’ operating agreement establishes the expectations of your business. It should include the expected length of the LLC (in perpetuity is an option), date of formation, address and name of the registered agent (to whom legal documents are sent), the purpose of the formation, information on each member and a list of their contributions to the business (cash, personal property, etc.), liability of members, procedures for new members, possibly a detailed section on the duties and expectations of management, fiduciary duties of staff members, the processes of dissolution and termination, as well as miscellaneous provisions to help protect the company in any given situation. All these possible terms and conditions, on their face, sound straight forward, and many are. However, each has varying options to consider. It’s like a puzzle that needs to be put together, but the pieces are ever changing until you find the right fit.
But wait a minute, is an operating agreement required with all LLCs in North Carolina?! No, it’s not required. However, without an agreement the members have no proof of their initial investments and contributions to the company, how to add or terminate members, or how to dissolve or sell the business. Ultimately it might come down to who is owed what amounts of money and/or who should be shouldering what debts. All too often people enter into business dealings by handshake. I wish that were still sufficient, but unfortunately things happen; people disagree and/or can turn on one another. It is very risky to presume that the members will always agree and/or remember the terms of their “agreements”. If there is no operating agreement in place, the business and its members would be stuck utilizing our state statutes on the issue, which gives little to no assistance in our opinion.
Let’s be honest, lawyers can be expensive. If you want us to stay out of your business and/or your personal lives, we recommend that you do all the right things on the front end starting with an operating agreement.
At Marcellino & Tyson, we understand that starting a business isn’t easy. We recognize the possible risks as a business owner, but with a handful of attorneys on standby to assist in the drafting of your agreement or other business and employment needs, we’re here to help protect what’s yours!
The purpose of Marcellino & Tyson’s blog and information postings is to provide news, general information and a general understanding of the law. All content is for informational purposes only and is not legal advice. In addition, reading our informational news does not establish an attorney-client relationship. If you are seeking legal advice, we encourage you to contact an attorney to evaluate your needs.