Business Law Basics: Why Your Business Needs an Operating Agreement

Getting your new company off the ground? The first step from a legal standpoint is formally registering and structuring the business – but don’t stop there! (Many business owners DO stop there… and end up regretting it.)

There are a number of additional legal documents which should be created, even though they aren’t required by the state of Florida. This proactive planning can save your business from a host of time-consuming and expensive problems down the road. One of the most important examples is an operating agreement.

The operating agreement is a wide-ranging document which defines the legal relationship between the business owners. It also provides legal clarity for a number of issues, several of which we will discuss below.

Without an operating agreement in the state of Florida, your business is subject to generic state regulations – and you would probably be surprised to learn what that means. For example, if you launch a business with a partner and he or she decides to dissolve the company, state regulations likely will leave you powerless to stop it from happening. For that reason alone… you need an operating agreement.

The operating agreement will define each partner’s capital contribution and how the capital contribution relates to the percentage of the profits each partner is entitled to. An operating agreement should also define the procedural aspects of running a business: meeting dates, voting requirements, and each member’s voting powers. Defining procedures provides an opportunity to further refine each partner’s ideas about how the business will be run.

An operating agreement is also a good place to provide for the unexpected: a partner who wants to leave the business, the death of a partner, or a crisis that results in the dissolution of a partnership. If an operating agreement spells out how to handle potential crises before they happen, things will run much more smoothly should a crisis actually occur.

Finally, your operating agreement gives you the opportunity to address the decision making process within your business. It is necessary for a business with more than one principal to have a procedure in place for reaching a decision when there’s no consensus between the partners. Otherwise, you risk “paralyzing” your business if you can’t come to an agreement.

For these reasons and more, your business absolutely needs an operating agreement. While I highly recommend that you create this agreement before launching the business, it’s never too late. If you’d like to discuss this process further, please contact me today!