Day-to-day business runs more smoothly with a current operating agreement
The state of Oregon doesn’t require businesses such as LLCs to have an operating agreement, but smart businesses have one regardless.
Besides, the state might not require an operating agreement, but your lenders and investors probably will. Plus, running a business has more than enough day-to-day challenges. Your key people should all be on the same page about how you want the business to operate.
Don’t have an operating agreement yet? This document can be a straightforward way to set down the rules of the road for your Oregon business. If you do have an operating agreement, when was the last time you reviewed it? Just like your business plan, occasionally reviewing and updating your operating is just smart business.
What is an operating agreement?
Corporations have bylaws, which specify how the corporation will be run. An operating agreement is like bylaws for other business entities. Having an operating agreement is your way to ensure, as a business owner, that the business will operate in a manner consistent with how you want the business to run.
Why is an operating agreement essential to my business?
For LLCs, operating agreements help protect the limited liability status of the business.
They also can be key in preventing or resolving misunderstandings or disagreements in the midst of day-to-day hustle and bustle. After all, often a business is founded with certain oral agreements and understandings between the key figures. The operating agreement sets out a clear, agreed record of those understandings.
What should my Oregon business operating agreement include?
A written operating agreement is a confidential document for owners and key management. It does not have to be filed with any government agency. In addition to digital backups, a hard copy should be kept in a secure location with your other foundational business documentation.
Operating agreements don’t have to be thick books. Typically we’re talking about a document that’s no more than 20 pages long, drafted by your business law attorney. Here are some common things to include:
- Ownership and percentages of ownership for each owner
- Duties and powers of owners and management
- Internal operations, including overall employment and management
- Procedures for profits, losses, and distributions
Here are 5 other important considerations when setting up or reviewing your business’s operating agreement:
1. What happens if one partner wants to exit the company or one partner wants to oust another partner?
No matter the intentions of the founding owners, things can change. Your operating agreement should lay out a procedure for partners to exit the business or be removed by the other owners.
2. What happens if a partner dies or is disabled?
Unfortunately, death and disability are realities of life. Make sure your operating agreement contains provisions that account for buyouts, voting rights, and membership interest in the event of a partner dying or becoming disabled.
3. Reconsider member’s roles and responsibilities.
The operating agreement should specify various roles and responsibilities owners and key managers have. Over time, however, the business can shift, or parties may want or need to migrate to different roles with different responsibilities. Make sure your operating agreement not only lays out these key roles, but also that these are reviewed and updated as needed.
4. Reconsider profit-sharing.
How will profits be distributed to partners? Is it time to change how profits are being used or distributed? What percentage of profits should be reinvested back into the business? Will there be bonus-style distributions of profits to non-owner employees? Whether setting up or updating your operating agreement, make sure you have set realistic profit-sharing procedures that match the business’s profitability.
5. Updating capital contribution ledgers/loan ledgers.
The initial capital contributions made by founding partners should be documented as part of the operating agreement. Any additional loans or contributions to the business should also be documented along with payments and dividends. This type of documentation is often overlooked, but ends up being important for taxes as well as any when a partner wants to leave the business.
Set up or review your Oregon business operating agreement today
The operating agreement is a workhorse document that can be key to helping your business run smoothly. If you don’t have an operating agreement, getting one put in place can take less time than you think. And if you do have one, odds are it’s time for a review.
Make sure your business has the rules of the road it needs to help operations run smoothly, keep owners on the same page, and increase your chance of running a profitable operation: Set up or review your Oregon business operating agreement today.