Most
operating agreements have standard sections, but that doesn't mean that changes
can’t be made. An operating agreement should not be viewed as a
one-size-fits-all document. Each business is unique and these provisions should
be clearly laid out to handle issues as they arise.
Here
are some sections and key points that deserve special consideration when a
business draws up an operating agreement.
- Capital and capital contributions — Subsequent contributions should only be an obligation if unanimously agreed upon by all the members.
- Allocations and distributions — The company should have the right to distribute cash and property to the members pro rata, based on the relative membership interests.
- Management — The managing member should have the power pursuant to the operating agreement to perform the following on a day-to-day basis: open and manage bank accounts, borrow funds or establish lines of credit up to $5,000, purchase insurance on company assets, enter into agreements with vendors, suppliers, and contractors, and perform other operational tasks and duties.
More
substantial actions should require the approval of a majority percentage of the
members. These can include: borrowing more than $5,000 or making any capital
expenditure in excess of $5,000, commencing lawsuits or other legal
proceedings, making a filing under the Bankruptcy Code, purchasing, leasing, or
disposing of property—including real property—in excess of $5,000. Lastly, any
action to dissolve the company would fall under a majority percentage of member
participation as well.
Adding
new members to the company (or altering the percentage ownership in the
company) should require the unanimous approval by all members.
Withdrawal and transfers of
membership interests — This should cover such issues as how a
member may withdraw from the company prior to the winding down and dissolution
of the company, such as if a 60-day prior notice should be given. Also,
restrictions on transfer should be clearly laid out, and sale of membership
interest details should be given so that adequate time requirements are made
known to all members.
A
very important provision you always want to include is what would happen in the
event of a member’s death, or if a member gets divorced. Washington is a
community property state, which means that a spouse has a 50% interest in every
single dollar made by a spouse. In every business, a spouse automatically
shares a 50% economic interest with the other spouse. So a divorce could
significantly impact the business if provisions aren’t made.
I
always recommend a clause that says in the event of disillusion of marriage,
we’ll recognize that the divorcing spouse has a 50% interest that’s economic
only. The divorcing parties agree to put a dollar figure on that interest and
the non-member spouse is given 50% monetary value, but not membership in the
company, so he or she would not be able to make any decisions pertaining to the
business.
Since each business is
unique, your business may require special language to protect all members. If
you are considering drafting an operating agreement for your business, contact us to set up a consultation.
