Operating Agreements and Why it's Important to Have One

We get lots of calls at Downs Law about Operating Agreements. Generally, it's a partner in a business where everything was going great - until it wasn’t. Our first question is always: Do you and your partners have an Operating Agreement? And unfortunately, sometimes the answer is “no.”

It might be a situation where two friends have an idea for a company they want to start together. One contributes the money, while the other runs the business day to day. Things go well for a while, each year is more profitable than the last, and the future looks bright. Then something unexpected happens - like one of the partners going through a divorce - and they can no longer devote the time or money to the business as before. One wants to sell, but the partner doesn’t and they can’t come to an agreement. What should they do? If they don’t have an Operating Agreement, there is no road map for how to handle this situation, and no easy answer.

An Operating Agreement is essentially an instruction manual for how your limited liability company (or LLC) will be structured. It determines who owns what percentage of the business, who can make major decisions (such as borrowing money), how to value each partner’s interest in the company, and the conditions for bringing in new members. Operating agreements also provide guidance for what to do in the event of a dispute.

The best time to draft an operating agreement is on the front end - before your business is operating day to day. This means you’ll need one in place before money or time is invested. Working together with your fellow partners to formulate an operating agreement is a process, and in doing so, you will work out a shared vision for the business you will run together. And even if you are the sole owner, there are many practical reasons for creating an operating agreement, such as establishing business bank accounts or attracting potential investors.

These agreements, although not technically complicated, are much like having a Will - they are super important when you need one. Agreements can also always be amended when partners, investments, time or career opportunities change. Downs Law is well versed in helping businesses of all sizes put together operating agreements that protect the interests of all parties involved. Reach out to us today if you have any questions about your current Operating Agreement, or if you need to get one started!