In order to run an efficient and successful LLC, it is imperative that a well-planned Operating Agreement be created. For example, an Operating Agreement sets up who runs the day-to-day business, and creates a system for resolution of internal disputes between members. I tried to have my two-year-old daughter sign an Operating Agreement to help us resolve conflicts but she’d rather just throw her bowl of milk and Cheerios on the ground._
By creating voting standards and/or a buyout option, an LLC can avoid judicial dissolution of the company when these disputes occur between members. Imagine having a company that creates a successful product, let’s say a t-shirt company, then suddenly one of the members only wants to make t-shirts without sleeves. An Operating Agreement would allow the members of the company to handle this dispute while keeping their company, and sleeves, intact. The other member could be bought out, and then take the money to Mississippi to start a very successful no sleeve t-shirt company, all without having to throw their bowl of Cheerios on the ground.
A well-designed Operating Agreement can also handle the unfortunate situation of the death of a member. Let’s say a member of a company that makes trampolines and industrial ceiling fans dies suddenly for obvious reasons. This member’s family can be taken care of for all of that member’s hard work without having these same family members interfere with the business operations.
Finally an Operating Agreement protects a business’s intellectual property. This includes trademarks, copyrights, and trade secrets. If a company is formed without an Operating Agreement, a member can try to claim the intellectual property as an individual asset, instead of an asset of the business. For example, if John Mayer’s band broke up without having an Operating Agreement in place, someone else in the band could claim that their body was a wonderland. If you didn’t get this joke, it was very funny.
In other words, creating an effective Operating Agreement is really important for a new business. That is why I let Elliott Stapleton help me create mine. Now I just have to find investors to buy into my no sleeve t-shirt company idea.
You may also enjoy reading Part 1 and Part 2 of the Starting a Business series.
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Elliott Stapleton Attorney with CMRS Law