The Benefits of Creating a Business Operating Agreement

A surprising number of businesses operate without an operating agreement or with a poorly crafted one that was put together without a lot of thought and foresight. When owners of a new business form a partnership or LLC, they are already being pulled in numerous different directions just getting the new entity off the ground. In the midst of all of this, many of them forget to take time to establish firm operating rules and put them in writing.

Why is a Business Operating Agreement Important?

A business operating agreement is very important, because it allows the owners to set up specific rules for how the business will be run. In the absence of such an agreement, the business will fall under the standard rules of the particular state in which it is located. Not having a written operating agreement also significantly increases the chances of misunderstandings and disputes arising between owners.

A partnership or operating agreement is a contract between owners that establishes the operational, managerial, and financial rules of the organization. This provides clear guidelines and protocols that owners and managers are required to follow. 

Some of the most important areas of the business that can be covered with an operating agreement include:

  • The capital contributions of each owner.
  • The percentage of the business that each partner owns.
  • The roles and responsibilities of each owner.
  • The powers and duties of owners (and managers if applicable).
  • Owner salaries and the procedures for distributing profits and losses.
  • Procedures for hiring, training, and managing employees.
  • Procedures for selling interest in the business, transferring interest to a new owner, buyout clauses, what happens in the event of the death of an owner, and other buy-sell provisions.
  • Conflict/dispute resolution procedures.
  • Business dissolution provisions and procedures.

As a business evolves, some of the rules, procedures, and provisions that are established in an operating agreement may become outdated and no longer makes sense. For this reason, it is wise to revisit your business agreement on a regular basis; if not annually, at the very least as part of a three or five-year plan. This helps ensure that your agreement remains in alignment with your business goals and objectives.

One smart way to keep things up to date is to weave your business operating agreement review/discussions into your annual budget and strategy meetings. During these meetings, be proactive in discussing any disconnects, changes needed, etc., and create an environment where owners and managers can voice their opinions on these matters. Giving the stakeholders a fair hearing can often result in new ideas being voiced that might make the business better, and it also helps avoid the buildup of frustrations and resentment that can lead to serious conflicts. 

Creating Your Business Operating Agreement

If your business currently does not have an operating agreement or all you have is one of those cookie-cutter templates you get online, the good news is that it is never too late to set one up the right way. One of the most effective and cost-efficient ways to accomplish this is through mediation. Mediation can be used to develop an initial business agreement or to modify an existing agreement.

Business mediation is facilitated by a neutral, third-party mediator who has no vested interest in the outcome of the process. This gives participants an outside perspective on their business, something that is often needed in order to point out issues that those who are too close to the situation might have overlooked. The mediator has no authority to implement any particular rule or provision, their expertise lies in their ability to establish common ground among participants and guide them toward an agreement that everyone can be happy with. 

For business owners who decide to go this route, it is important to choose a mediator with a good amount of business experience under their belt. The business and corporate world is growing increasingly complicated with each passing year, and it is very helpful to work with a professional mediator who has been in business themselves and has an in-depth understanding of the many challenges that owners face in today’s world.

Trust AMS For an Operating Agreement Your Business Can Live With

If your business needs a partnership or operating agreement, Advanced Mediation Solutions (AMS) is here to help. Our business mediator Carmela DeNicola is a lifelong entrepreneur who also has over three decades of executive experience in the corporate world. Carmela has worked extensively with businesses and entities of all types and sizes, and her depth of knowledge gives her unique insights that help owners develop more creative and innovative agreements that effectively address their unique needs and goals.

To learn more about how AMS can help your business and to schedule a free consultation, message us online or call our office today at (856) 669-7172. We look forward to serving you!