A Guide To All Things Operating Agreements | 6 Common MISTAKES Upon Drafting

Have you ever been confused about an LLC operating agreement? What exactly is it? Do you need one? And how are you supposed to form one? In this video today, we're going to talk all about operating agreements, and I'm going to give you my 6 major mistakes that most people make in their operating agreements. I'm Attorney Brittany Ratelle. I'm an online business attorney, and I'm here to help you get legally legit. Remember, on all of my channels, the information that we present today is just for informational purposes only. While I'm an attorney, I'm not your attorney, but I hope this is helpful and that you take away some good lessons on how to move forward with more confident. So let's get into it. How can we wrap our arms around operating agreements? Number one is we want to make sure that we understand that an operating agreement is really the internal rules for running your business. So when you set up an LLC or a limited liability company, you are setting up a new entity. And one of the most important things that we want to make sure that our LLCs do is that it actually limits our liability. It puts that fence in between our business money or business assets and our personal money and personal assets. This is an LLC's whole job. And a big important part of that job is making sure that we have the documentation and the actions on the other side to make sure that we don't mess that up. And that if anytime in the future something happens to our LLC or to our business, that we get a litigation judgment or a lawsuit against us, or we have a debt, we want it to remain a business problem and not a personal problem. So the first decision that we want to make is, is an operating agreement going to be member-managed or manager-managed? Managed. And this is a really important decision and it's something that you want to understand and is going to be based on a couple different factors. It might be based on how many members are in your business. For example, if you are a single-member LLC, meaning it's just you, then you probably are fine with being member-managed. That means you, the member, are making all the decisions for your business. You are managing the show. However, if you are in an LLC with other people, okay, and there's multiple members, even if that's a spouse or a friend or a family member, then you may want to select to be manager-managed business. I know this is a lot of Ms, right? And if you decide to be a manager-member business, then this needs to be documented in your operating agreement, and it also needs to match whatever you signed up for when you signed up to be an LLC. Now, if you did those on your own and you're not quite sure you did this right, that's okay. You can go back and amend those. If you use some third-party company, I got bad news for you. You can probably amend it. They're also probably going to charge you for this, and it's going to take longer. That's just one of many reasons why I don't really like using third-party form companies. Again, if you have other members and people in your business, the reason why you might want to be manager-managed is you might want one person or maybe only some people to be the ones actually making the decisions. And maybe that some of these other members are contributing things like money or they're functioning more as an advisory board, or maybe they're investing, but it's your intent that maybe you have a closer inner circle or maybe only one person who's really running the show and making the decisions. If that's the case, then that's exactly what you want to have spelled out in your operating agreement. And believe me, you want these decisions to be made early in your business so that we can avoid a big headache and hiccups later if plans change and people's expectations change in your business. Number 2, let's talk about distributions. Distributions are going to be about money, and we want to make sure we're having it really clear on who is going to get distributions for the company. How much are they going to get? Is there going to be a set number? I don't recommend that you put any set numbers or pro rata distribution language in your operating agreement. I recommend that you put in that the members or the managers will agree by writing if and when they want to take money out of the business and actually pay and take that profit distribution, because there could be all kinds of reasons why you decide that you don't want to take money out of the business right now. Mistake number 2 I see a lot of people making is putting in language that requires you to make certain distributions at certain times. Don't box yourself in like that. Make sure you have options and flexibility depending on how much money you make and different business cycles. Mistake number 3 I see is putting in language about the capital contributions in the business and when those can be taken out and giving someone a right to return the capital in their business. This sounds like a good idea in theory, I understand, but there can be lots of reasons why you actually don't want this to be the case. What if you're facing a litigation and you actually don't want that money to come out? You want that to stay in the business. Or if someone's going through a divorce or other life event and you want to keep that capital in the business. What if for tax reasons you want to make sure that you don't have a right to that money and that money stays in the business? This is something you definitely want to be working with a good certified public accountant or tax law strategist to make sure that you're taking advantage of all the opportunities to minimize your tax burden. Mistake number 4: people don't put in any language about intellectual property. And this is a huge mistake, especially for a lot of the clients that I serve that may be like you, who the biggest asset that you have in your business is your intellectual property. In fact, that might be your entire business, especially if you're a thought leader, a creator, a personal brand, course creator, or you own a membership site. Literally the whole enchilada of the business is your intellectual property. And we wanna make it crystal clear that if you have other members of the business, or even if it's just yourself, that what intellectual property is being assigned or transferred into that business is staying in there. And that way, if you leave or someone else leaves, you want to make it really clear that they are not taking that intellectual property with it. These are sometimes called intellectual property assignments, but I like to make sure this language is in the operating agreement because the more contracts we sign, the more chances we have of things slipping through the cracks. Number 5, we want to make sure we have limits on spending or who has signing authority on the business. We want to make it really clear and actually have some dollar amounts. I recommend, and in fact I do this in my operating agreement in my creative contract shop, is who gets to spend up to what, so no one Hollywood and goes out and buys equipment or a truck or a new computer that you all didn't agree on, and that you can actually take some action against that person if someone does that and it's in violation of their fiduciary duty and the boundaries and rules that you set up in your operating agreement. And then number 6, we want to make sure we have restrictions on transfer, that someone can't just hop into and take over someone's interest in this company without our wherewithal. What you don't want to happen is for you to have a stranger become your business partner, especially if someone decides they want to leave your company. And this is all part of really smart exit planning, that if someone wants to leave your company because of a life event or you reach a roadblock, that there's a certain path that they have to follow to be able to. And usually they have to give a first right of refusal or an option for the other members or the company to purchase their shares back before they can give it away or sell it to someone else. Remember these 6, okay? You want to make sure you have a very clear on member-managed versus manager-managed, having a clear outline for distributions and the voting authority on capital contributions and what money goes into the business, intellectual property contributions., and how's that gonna work? Limits on spending and signing authority for the business and restrictions on transfer. Now, there's lots of other things that can go into crafting a good operating agreement, but the bottom line here is that this agreement is a critical piece. It's one of the most important things you can do for yourself and your future selves to make sure that you avoid an ugly business divorce. In fact, I call operating agreements business prenups for this exact reason, because you are setting yourself up with clear boundaries, clear conversations, even if they're slightly awkward. I understand that talking about some of this stuff might seem weird because it's about people leaving or changing or dying and other stuff happening that may change the beautiful picture and vision you have outlined for your business. But the reality is, is that life happens, okay? And the only certainty are death and taxes. So it's really smart in the honeymoon phase of your business to do some business premarital counseling, and that includes drafting this smart operating agreement. Now, if you need one of these agreements, make sure you look in the comments below for a link where you can grab one of my attorney-drafted, industry-tested contract templates that sets out a beautiful operating agreement with color codes that you Customized. I'm attorney Brittany Ratelle. Thanks so much for being here. Make sure you like and subscribe to the channel so you can get weekly tips on how to protect and scale your business.