Best Practices for Business Management & Operating Agreements

Best Practices for Business Management & Operating AgreementsStarting a new business is exciting, but it is important to make sure proper management & operating agreement is in place before you begin your new enterprise. A corporate business attorney can help you create a comprehensive agreement that outlines each person’s roles, responsibilities, and rights. A solid contract can also provide an exit strategy in the event of a shareholder’s incapacitation, passing, or leaving the business.

Rights & Responsibilities

Business owners typically make a capital contribution to a new start-up, whether it is cash, real estate or other assets. It is critical to include each owner’s contribution and to be specific when defining ownership rights and profit-sharing. Outlining how initial capital will be spent is important as well. Your agreement should also include a contingency plan in case your new business needs additional investment before turning a profit.

Being specific about how the earnings from a business will be distributed is vital. Ambiguous clauses and other uncertainties can cause serious problems once you start turning a profit. If members are drawing a salary at the beginning, make sure amounts are clearly stated and include any provisions for future raises. If the intention is to repay seed capital, your agreement should specify at what point this may happen. It is also imperative to define how future distributions and will be allocated.

The more specific you are about each shareholder’s rights and responsibilities, the better. The agreement should outline how important decisions will be made. Will you use a “majority rule” or consensus approach? Will one person have the final say when it comes to making decisions? Hashing these things out can also help you understand one another’s approach to day-to-day operating s and how the business will be managed. Sometimes business owners simply cannot agree. Having an experienced business contract attorney draft your management & operating agreement can help you resolve conflict more easily and avoid headaches down the road.

Dissolution of the Business

Although no one likes to think about things not working out when starting a new business, health crises, death, disputes, and other issues can arise. Include clauses in your agreement that provide a strategy for buying out a member’s interest or taking on their responsibilities in the event that they can no longer continue. In addition to including these things in your management & operating agreement, it is a good idea to have a business succession planning lawyer help you create a separate business succession plan that addresses these issues and scenarios in more detail.

Keep Your Agreement Current

Change is inevitable. Your business may expand, a founding member might leave, or you may bring new members on. These are just a few of countless potential unforeseen events that can affect the stability of your enterprise and change the way you do business. Reviewing your management & operating agreement with an attorney periodically and making adjustments as you go can ensure everyone’s rights and interests are protected.

If you need help creating a well-crafted management & operating agreement and business succession plan, our team at Carosella & Associates can guide you through the process and ensure all your legal bases are covered.