Monday, January 28, 2013

Discussion points for creating an operating agreement

Having an operating agreement for a multi-member LLC or partnership is not only a legal requirement, it is also a key to a successful operation.  Here are some questions each individual should answer and then compare to see if you are ready to start your business.

1. How much money will each contribute? (Suggestion: Both should contribute equally. Avoid sweat equity situations as one partner will become resentful of the other).

2. Is equity ownership equal? (Suggestion: Decide if it is best to have equal ownership to avoid disputes and resentment or if it is better to have one partner with slightly higher % to avoid “ties”)

3. What is initial capital contribution? (Suggestion: Make it equal, put it in a bank account, and draw ALL expenses out of that account).

4. What if one partner isn’t holding his/her weight? (Suggestion: Give 30 days to correct, and then set up buyout arrangement). Also determine what will happen if a partner is incapacitated due to mental or physical illness.  How long can they be ill without working and what will happen?  How will you determine if they are incapacitated?

5. What happens if partner dies and has spouse/family? (Suggestion: Let shares pass to spouse, or buy spouse out at market. But spouse has no voting rights, and can only sell his/her share with written approval of other partner). Also put in wording regarding a divorce.  Wisconsin is a marital property state and you probably don’t want an ex-spouse as a new partner.

6. What if one partner wants out? (Suggestion: Do you want to penalize a partner for wanting out. Don’t reward him or her. Appraise the enterprise and then buyout over a period of time at a discount)

7. Once profits appear, do you reinvest or pull money out? (Suggestion: Decide this before you sign the operating agreement)

8.  How will you pay yourselves?  Will you take even draws based on the excess amount in the checking account or will it be based on hours worked or billable hours worked or revenue created by each partner?  Be very specific.

9. What is your exit strategy? (Suggestion: All must agree on ultimate goals of venture and time frame to get out).

10. What is your growth/operating strategy? For instance, is it slow and steady growth, or massive investment to get customers? Are you frugal or do you get a nice office to impress investors, or something in between?

11. What is capital strategy? When will you take on debt? (For growth, for capital equipment, to fund losses?)

12. How will you resolve disagreements?

(Suggestion: Select someone now to act as arbitrator)

(Suggestion: Handle all disagreements in person, not on the phone or via email)

13. What specific tasks will each partner be responsible for? (Personnel, finances, dealing with the landlord, dealing with the bank, marketing, etc.)

14.  Review the mission statement of the business to make sure you are in agreement as to the main focus of the enterprise.

Everyone must be in agreement on all these points before the business can begin.  Getting this in writing is the best way to insure a successful business partnership.

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