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Why your business should have an operating agreement

On behalf of Kadish & Associates Law Group posted in Contract Disputes on Saturday, May 23, 2015.

If you are creating a small business with a partner, or in the midst of running one with someone, you may not have considered the importance of a comprehensive operating agreement. After all, you and your partner(s) likely do well by just following your instincts and what you already know about the industry and the marketplace.

However, having business faults is simply a part of doing business. Because of this, it is important to have instructions for what to do when things break down or if a partner wants to leave the business. With that, this post will focus on reasons why your business should have an operating agreement.

  • Ownership interest – An operating agreement should spell out what each person’s ownership interest in the business. As well as the reasons behind the ownership percentages (i.e. capital investment, management duties).
  • Rights and responsibilities – The agreement should also define what each partner’s responsibilities shall be in furthering the business. It is not uncommon for one partner to be responsible for business development while the other manages the day-to-day operations. Also, the more partners (or members) involved, the more duties that can be divided.
  • Profit and loss sharing – When it comes time to distribute profits at the end of the year (or quarter depending on your agreement), it is good to have a detailed plan that describes how they will be divided.
  • Buyout rules – When a member or partner can no longer contribute to the business (either through death, disability or incapacity) it is also good to have a plan for how a person can leave the company and cash out their ownership share.

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