What is Operating Agreement Drafting?
An operating agreement is a legal contract that clarifies how a limited liability company (LLC) operates. It should specify important aspects, such as how its management is structured.
It is typically shared between business owners to minimize their risks and prevent disputes. The agreement can achieve this by explaining member percentages, financial duties, and more.
Read the rest of this article to explore operating agreements in greater detail and find out how to draft one that’s accurate and legally valid. We’ll also feature ways in which a qualified lawyer can help you with the operating agreement drafting process.
What are Key Terms in an Operating Agreement?
An operating agreement requires important terms to be comprehensive and legally solid.
- Membership. All members’ names and ownership percentages must be included.
- Contributions. This outlines what each member will contribute to the business, such as money.
- Management structure. This part of the agreement outlines if the LLC is member-managed or manager-managed.
- Voting. It’s important to clarify how much power members have when voting. This is usually based on ownership percentages.
- Allocation. This clause specifies how the profits and losses are distributed between members.
- Buy-sell provisions. If one member leaves, such as because they’ve retired, there should be provisions in place for what happens to their shares.
- Dispute resolution. This explains how conflicts can be resolved effectively, such as via mediation or arbitration.
What are Tips for Drafting an Operating Agreement?
An operating agreement should be drafted professionally. Here are some tips to bear in mind when considering what to include in it.
Write a Statement of Intent
A statement of intent clarifies the business activities to guide decisions and help all members understand the LLC’s goals.
Detail Contributions
The operating agreement should specify members’ initial contributions and additional contributions that might be required. These additional funds can be used to cover shortfalls or business acquisitions, for example.
Clarify Rights
The agreement should explain certain rights, where applicable, such as drag-along rights in which majority members can require all members to vote in favor of a business sale.
Consider Taxes
You’ll have to decide if the LLC will be taxed as an S-corp or pass-through entity. You should also appoint a member to be responsible for tax matters. It can help you to work with a tax advisor for assistance so that you fulfill and address all your tax obligations.
Make it Clear
An operating agreement should be drafted in clear, simple language so that all involved parties can understand it. Avoid vague wording or dense legal jargon that can be confusing. This will go a long way to prevent confusion and disputes.
Avoid Verbal Agreements
Although you might think that verbally agreeing on issues or terms with other members is sufficient, it doesn’t provide as much legal protection as having a drafted contract. By having all the terms down in writing, your operating agreement will protect the business and members from conflicts.
Do You Need an Operating Agreement?
Although an operating agreement isn’t always legally required, it’s recommended to draft one because it determines how your business will operate and how much money partners will invest in it. Other important aspects the agreement can tackle include how disputes between members can deal with disagreements.
Should a Lawyer Draft Your Operating Agreement?
It’s advisable to hire a lawyer to write your operating agreement because it’s one of the most critical documents for your LLC. Here are some ways in which a lawyer can help you during the contract drafting process:
- They’ll check that your operating agreement is compliant with all state laws and legal requirements to prevent legal battles in future.
- They’ll tailor the agreement to suit your business structure, your goals, and your interests.
- They’ll clarify all member duties and decision-making authority so that there’s no uncertainty.
- They’ll make all terms fair but legally enforceable.
- They’ll include a dispute-resolution clause so that you reduce your risk of costly and time-consuming litigation.
- They’ll protect all members from personal liability.
- They’ll identify potential financial or legal risks.
- They’ll avoid using any vague or ambiguous wording that can result in disputes.
- They’ll ensure the contract is flexible and caters to both parties. This can include negotiating with parties to finalize favorable agreement terms.
Where to Find a Lawyer for Operating Agreement Drafting
If you need to find the best lawyer to draft your operating agreement, you don’t have to cold-call traditional firms or ask around in your network. You can find a suitable lawyer by visiting an online legal platform where you can connect with lawyers to help you.
On ContractsCounsel, one of the largest online legal marketplaces that gives you access to a curated network of vetted lawyers, you’ll find a lawyer in your location and who has the expertise required for drafting a solid operating agreement.
To request a lawyer on the platform to draft your operating agreement, follow these simple steps:
1. Go to the ContractsCounsel marketplace, where you can post your project for free.
2. Include a few details of what you need so you’ll be directed to the best legal matches.
3. You’ll receive multiple bids from lawyers directly on the platform who can assist you.
4. Once you receive the lawyer bids, you should review the lawyers' profiles. There’s lots of info on the platform to help you choose the best lawyer, such as their location, client ratings, years of experience, and field of expertise.
5. Connect with a lawyer you think is best suited to your requirements and hire them. You can also schedule an online legal chat with a lawyer if you have any queries.
