As you form your company, you probably have high hopes for the success of your business. While you trust your chosen business partners, you also need to consider your interests in the event that your company fails, or you decide to part ways. A proper operating agreement may help protect you and your company.
What should you consider?
Imagine a family dinner, your loved ones excitedly asking about your new venture. What’s your value proposition? Who are your business partners? When do you plan to start marketing your product or service?
And then your uncle Dan chimes in: “How are you going to protect your investment? What is your exit strategy? Don’t allow your vision to cloud your judgement.” Meanwhile, everyone else groans and starts clearing the table, tired of his perceived pessimistic lack of encouragement.
But, in business, it may be appropriate for business owners like your uncle Dan to raise such questions about forming your partnership, especially when it comes to a limited liability company (LLC). His own experience may equip him to educate you about what he’s learned, along with his top considerations for an operating agreement.
3 things to consider in your operating agreement
Left alone at the table with Dan, he may happily convey what he has learned from those with experience in business formation. Many experts would agree that to protect your interests in business, you may want to consider:
- What is your percentage of ownership? For your LLC, your ownership may be based on the amount of cash you contribute to the startup. Certain contributed property and services may increase your percentage of ownership as well. In some cases, ownership may be determined equitably among your partners, without consideration to initial contributions. You may want to think twice about your agreement with established percentages before signing documents to help avoid arguments or possible resentment toward your partners in the future.
- How are changes in ownership to be handled? Your operating agreement should include what will happen to your business interests should any partner decide to alter the terms of the deal. This may include member rights to purchase another member’s ownership if they decide to sell out or in the event of their passing, disability or retirement.
- Who can vote on important decisions? Many of your company decisions will be reached through informal agreements. However, you may establish that you should have more votes than another of your business partners, based upon your percentage of ownership.
While your optimism may keep part of you from heeding uncle Dan’s advice, the general wisdom of those who have gone before in business may be just what you need to maintain your say in your company’s proceedings in the years to come. And who knows? At some point, you may agree that this “pessimism” may have been your saving grace.