What is Operating Agreement Negotiation?
An operating agreement is a type of legal contract that explains how a limited liability company (LLC) operates. It clarifies various terms for business owners involved in the agreement, such as their obligations and member percentages.
It’s essential to negotiate an operating agreement to protect your interests and resolve issues so they don’t become disputes.
Read the rest of this article to explore how to negotiate operating agreements and how a lawyer can help you before, during, and after the process.
What Key Terms are Usually Negotiated in an Operating Agreement?
An operating agreement usually contains key terms such as the following:
- Structure. Whether the LLC is member- or manager-managed, the agreement should state its structure and outline each member’s authority.
- Decision making. It must be made clear how decisions will be made and how deadlock situations can be resolved.
- Profits and losses. How profits and losses are shared between members must be explained for clarity. The split isn’t always aligned with ownership percentages.
- Dissolution. The operating agreement should specify how the business will be dissolved should members choose to close it, such as what processes must be followed.
- Dispute resolution. All parties should have clarity about how disputes will be resolved, such as if members have to go to mediation or arbitration.
What are Tips for Negotiating an Operating Agreement?
There are many important aspects of operating agreements you should consider negotiating for more favorable terms. Here’s a rundown of some of the most crucial.
Discuss Debts
While explaining how profits and losses will be divided between members, you should also figure out who will pay for debts if something goes wrong. This will prevent a situation in which one member is responsible for hefty financial obligations without getting any help from the others.
Consider Your Obligations
All member obligations must be outlined in the operating agreement. However, a frank discussion over what they can realistically achieve can help you to prevent future disputes.
Specific duties that are assigned to the LLC’s members must be clear, and this is something investors will want to review as it sheds light on the company’s management and daily operations.
Clarify Buy-Sell Clauses
While it might not be nice to think about, there is a chance that serious disputes will occur down the line. You want to negotiate and agree on how these situations will be handled.
Explain Ownership Details
During discussions, you’ll want to consider key elements such as initial ownership percentages, vesting schedules, what happens to unvested shares when someone leaves the company, and how future contributions affect ownership.
Understand Capital Calls
If members are required to contribute additional capital in future, this must be clearly defined in the agreement. Members will also want to negotiate what happens should they not be able to make those financial commitments.
Be Clear About Breaches
You want to achieve clarity about what constitutes an agreement breach as this can vary from a dispute. Some of the most common breaches include fiduciary duty violations and unauthorized financial actions. It’s best for members to discuss these so that they’re on the same page and can avoid litigation.
Get a Legal Review
Prior to negotiating operating agreements, it’s worth getting a legal review of your contract by a professional lawyer. This will identify any hidden risks or issues worth negotiating with other members that you might not have realized.
An online legal platform like ContractsCounsel gives you access to vetted lawyers who can review your operating agreement. ContractsCounsel is one of the largest online legal marketplaces that connects you to a curated network of lawyers. To request that one of them reviews your operating agreement, follow these easy steps:
- Go to the ContractsCounsel marketplace where you can post your request for a contract review for free.
- Wait for lawyer bids. Lawyers on the platform will send you bids to work on your project.
- Review the lawyers’ information. The platform provides extensive lawyer data, such as the lawyers’ location, expertise, credentials, and client ratings.
- Select a lawyer whose qualifications are aligned with your legal requirements, and hire them to review your operating agreement for a flat fee.
How Does a Lawyer Help You with Operating Agreement Negotiation?
If you need to negotiate terms in your operating agreement, you should consider hiring a qualified lawyer for help with the process. They have the legal expertise and negotiation skills to assist you, such as by:
- Explaining the purpose and legal implications of each agreement clause.
- Identifying any language that should be clarified to prevent disputes.
- Drafting terms that align with the members’ objectives.
- Suggesting fair buyout and dissolution clauses to protect all members.
- Reducing your legal risks, such as by reviewing indemnification and fiduciary duty provisions.
- Checking that all discussions and agreed-on terms during negotiations are aligned with relevant business laws and regulations.
- Coordinating with other experts, such as financial advisers, for tax-related provisions.
- Balancing terms that reduce disputes while protecting your interests.
- Drafting your final operating agreement so you can be assured all its terms are legally valid, clear, and specific to protect members.
Where to Find a Lawyer for Operating Agreement Negotiation
Finding a lawyer to negotiate terms in your operating agreement doesn’t have to be a stressful experience. Online legal platforms like ContractsCounsel make the process easier. You’ll connect with lawyers who are experienced in negotiating contracts. They can also provide you with other legal services, such as drafting or reviewing your contracts to give you peace of mind before signing them.