How to Draft a Standard Operating Agreement on Your Own
Businesses usually begin with a big idea. But oftentimes, they end because of no follow-through on the little details. If you’ve already launched your LLC, congratulations! Your big idea is well on its way to becoming a big success…if you take the time to get the details in order. One of those details — which often gets overlooked in the thrill of starting a new business — is creating a standard Operating Agreement.
Which Businesses Require a Standard Operating Agreement?
If you ask us, all of them. Operating Agreements are not required to be filed with your state, but some states do require that you maintain them in your own business records. If you aren’t sure, check with your Secretary of State to learn more about the rules in your state.
If your question is why you need an Operating Agreement, we can help answer that, too. What it boils down to is this: An Operating Agreement saves you hassle, headaches and potentially a lot of money. Operating Agreements help you plan for the future and prepare for the unknown.
How to Write an Operating Agreement
Operating Agreements are complex and legally binding contracts that, once compiled and signed, cannot easily be broken. Our experts are always available to help you with your Operating Agreement, but if you want to take a DIY approach, here’s a how-to that will get you started.
1. Rally the Troops
Creating an Operating Agreement will require input from every member of your LLC. (If you’re wondering if you need an Operating Agreement as a single-member LLC owner, the answer is yes. Bonus: It’s much easier to gather the necessary parties, since there’s only one.) Once your partners have been rounded up, here are the items you’ll need to discuss and reach agreement on:
- The amount each member contributed to start the business, and how that translates to their ownership percentage
- When and how additional capital will be invested in the business
- The process for admitting new members to the business
- How annual profits and losses are divvied up among the members
2. Gather Your Materials
Putting together your Operating Agreement will be far less stressful if you have all your business information on hand, trust us. Hopefully, you have your LLC’s documents organized and easy to access. Pull your records, and start to compile your information. Here are the basics you’ll need to have to begin your Operating Agreement:
- Full names, addresses and titles of each initial member of the LLC
- Your Articles of Organization from your LLC filing
- Information on your Registered Agent, whether it’s a member of your LLC or a Registered Agent service
- State laws regarding LLC formation that will enable you to create a Statement of Intent — essentially a paragraph that outlines that your business is in line with state regulations
- Information on business term, which can be a set date the business will be terminated, or until agreed upon by all members of LLC, according to state law
- A written statement on the purpose of the business as it exists in the present time. You can also add the line, “and for any other lawful business purposes,” to cover any unforeseen future changes.
3. Consider the Hypotheticals
In a perfect world, you wouldn’t need to worry about what to do if your business doesn’t succeed, or what would happen if a member wanted to sell their share of the LLC. Businesses, however, operate in the real world, where anything can happen (and often does). An Operating Agreement will help you be ready for the unexpected, so you can navigate your business through even the choppiest waters. Here are the hypothetical situations you need to include in your agreement:
- How you and your other members will handle it if a partner wishes to withdraw from the business
- Agreements on how business interests will be transferred, along with handling of “right of first refusal”
- How the business will proceed in the event of the death of one of its members
- Detailed procedures on the dissolution of the business
- Procedures and practices for member voting
- Any applicable non-compete messaging and agreements
4. Compile Your Document
Now you’ve got all your information together, met with your fellow LLC members and you’re ready to put the actual document together. Here are some tips to keep in mind as you create your contract:
- Remember this isn’t a jumble of ideas scribbled on a bar napkin. Your Operating Agreement should be professional, detailed and comprehensive.
- Clearly outline bulleted sections of the agreement to make it easy for members to find the information they’re looking for.
- Remember that this is a legally binding contract, so the language you use must be appropriate and in alignment with your state’s business laws and regulations.
- There are numerous templates out there to give you a baseline. But a word of warning: No template is a one-size-fits-all solution — you’ll need to carefully edit and adapt the template to suit your business’s needs.
5. Dot Your Is and Cross Your Ts
Once your document is written and you’ve checked to make sure all the information and wording contained within is correct, you’ll need to present it to each of your members for their sign-off and approval. Keep the document in a secure location and consider allowing only one member to serve as the editor, to keep track of revisions.
Once the document is approved, you will need signatures from each member to ensure it is legally binding. The agreement can be filed with your other business documents. If you find you need to make an amendment to the Operating Agreement, you can read up on ways to do that appropriately and legally. Remember, changing your agreement is not something to take lightly, and should only be done when absolutely necessary.
Many times getting assistance with your Operating Agreement is the best choice. Our business formation specialists can help you create a customized Operating Agreement as part of your LLC formation, saving you time, money and legal complications.