If you need work done on an operating agreement for a new business or LLC, you’re not alone. Many business owners use ContractsCounsel to hire lawyers to help with operating agreements – drafting, reviewing, and updating them.
We analyzed a large sample of real client responses to questions we ask when posting a project so we can better understand how clients approach hiring lawyers for operating agreement matters.
Wherever you are in the process, this guide will help you understand the issues clients think through and how other clients respond.
Question: Have you already formed a business entity?
Answer: Roughly half of clients have already formed a business entity. The other half are gathering quotes for budgeting.
When requesting services from a lawyer, roughly half of the clients have already gone through the work in forming a business entity and need the document to create a document which governs it. The other half are pre-formation and lining up a lawyer to help, sometimes with formation itself.
Takeaway: You don’t need to wait to form a business to start thinking about hiring a lawyer to draft a professional operating agreement. These lawyers can also help advise on business formation and tax implications, if you are pre-formation.
Question: How many members or partners will be involved in the business?
Answer: The majority of clients have 2+ members as part of the business. However, some single members LLCs hire lawyers too.
More members (typically) means more complexity in terms and how the business operates and is structured.
Takeaway: If you have multiple members as part of your LLC, it is wise to engage a lawyer to help with your operating agreement given terms are typically more complex and the risk of disputes are higher (i.e., you won’t get into a dispute with yourself). Single-member LLCs may be more appropriate to use a template.
Question: What State is or will the business entity be formed in that requires an operating agreement?
Answer: Wide distribution, with Delaware, California, Florida, Texas, Wyoming and Colorado common.
Clients choose formation states for legal environment, taxes, and practical business reasons. Other states show up since they have higher populations and more businesses.
Takeaway: The highest number of requests come from states with favorable business laws or large populations.
Question: What is the normal ownership structure of the business between partners?
Answer: Percentage ownership is standard and 50/50 splits are most common. However, some businesses have unique splits.
Given the highest volume of requests are from 2 member LLCs, we see most ownership splits as 50/50.
Takeaway: Make sure to include cap table information/logic in the agreement. Define how ownership is issued, vested, transferred, and diluted.
Question: Will the LLC be member-managed or manager-managed?
Answer: Most are member managed. However, when multiple partners it is more common to be manager-managed.
Some clients are unsure and need clarity on day-to-day authority and major-decision approvals.
Takeaway: If a multi-member LLC, putting a manager in place will help streamline decision making. If you want it to be member-managed, voting rights will need to be laid out very clearly.
Question: Why do you need the operating agreement reviewed?
Answer: To make sure it is legally enforceable, clarify partner rights, confirm ownership changes, and protect minority interests.
Frequent reasons clients want to get their operating agreement reviewed: adding partners, understanding duties before signing, confirming compliance, clarifying voting/profit splits, succession and buy-sell planning, and tightening non-competes.
Takeaway: A review can be conducted for both an audit and to make substantive changes as the business evolves.
Question: Who drafted the operating agreement you want reviewed?
Answer: A variety of solutions – other lawyers, online templates, partner-drafted, or self-prepared (sometimes even using AI).
Online template providers are a common starting point for many – but those customers want to get lawyers to review the template to make sure they have the appropriate legal terms in them.
Takeaway: Many business owners start with template or low-cost solution, but eventually want a professional legal review to make sure the operating agreement has all the right legal terms and is legally sound and enforceable.
Question: What specific clauses or provisions are you concerned about?
Answer: Ownership transfers, voting rights, distributions/capital, removal/buyout, liability, and succession.
Clients have the most concerns about minority protections, transfer restrictions and ROFRs, profit distribution formulas, capital calls, removal and buyout terms, indemnification, and emergency authority.
Takeaway: Make sure you understand these terms since many other clients have routine concerns about them: transfers, money flows, control, exits, and liability. Clear, specific drafting prevents ambiguity and one-sided outcomes.
Final Thoughts on Operating Agreements
Operating agreements set the rules for ownership, decision-making, money flows, and exits. Make sure you run through the above considerations prior to engaging a lawyer, since these types of questions will be asked of you.
Need help drafting or reviewing an operating agreement?
ContractsCounsel makes it easy to find a lawyer for your project. Post your job and get free quotes from vetted lawyers in our network.
