Donna Bordeaux explains why every LLC needs an operating agreement. Cover partner exit rules, death and insurance buyouts, voting rights for silent and active partners, tax procedures, and what happens if you sell or dissolve.
Donna Bordeaux (aka Donna Genie).
June 14, 2022.
donna at P T Y O P accounting dot com (spoken/spelled in video).
pyopaccounting.com.
Foreign if you have an llc, make sure that you have an operating agreement. These are the instructions by which the LLC operates and it'll be required from time to time. If you're doing any financing bank arrangements, they will request to see that document. So this is similar to a prenuptial agreement if you were married and what you want to do in the LLC agreement is to specify what happens if. Now, if you are a solopreneur, you probably don't have much that you have to do to this because you're not going to sue yourself. However, you'll still need an operating agreement for banking information. But if you are operating a business with multiple people, an operating agreement is a must. One of the first things you need to decide is what happens if one of you wants out? Does the other have to buy them out? Who is required to tell who is required to authorize someone to exit? If you have more than two people, you may have to have a majority of the membership agree to something. Also, what happens if someone dies? I have heard of many businesses that have failed and had tremendous troubles based on this one thing. If you're going into business with someone that you are not married to, especially you may be in business with their spouse and that might not be your best business partner if that partner dies. So please make sure that you take a good bit of time to go through. What happens if one of the partners dies? Is there an insurance policy that will pay out so that the other partner can automatically buy out that partner? Do they have to offer it to someone else? What are the terms? Also a couple of other things. What are the special duties and restrictions of each partner? So is one partner going to be the money person and be in charge of all the banking relationships? Can both partners make loans for the business or sign contracts that combine the company? You'll want to dive into the structure of your business and agree to that stuff up front. Next up, voting rights. If there is a vote and you have multiple people involved, are they all weighted the same? In an LLC you can have different structures where people have different voting rights. So perhaps you have five people in the business, two of which are silent partners who've invested money but don't get involved in the decision making day to day? Do they have the same leverage and voting power as somebody who is involved in putting sweat equity into the business? Those are things you need to decide. Also decide on what your structure will be for tax purposes, for meeting purposes. When will you meet? How often? When will you have those meetings together? Obviously if you have more than two partners, sometimes having meetings with a lot of people can be a chore and a task and you want to make sure everyone is fully involved. So, so decide on a kind of a rough schedule. It doesn't have to be specific days of the year, but perhaps it's in a certain month each year. And lastly, what happens if you want to sell the business? You just both want out or you want to shut it down? How is that handled? If the business is operating at a loss or it needs money to pay off loans when it closes and it's not successful, who puts that money in and how does it get divvied out? So there are a lot of decisions to be made. If you have an llc, please, please, please do this before you begin operations. Think through all of this. Get your prenup in place. Make sure that everybody is going into this with open eyes, knowing what happens in the event of any weird situation that could come up. Don't wait until there's a problem to try to resolve this. It won't be resolved. And my last little tidbit of advice, I don't recommend going into any business with another partner unless you plan to be married to them. There are so many issues that can come about, and some partnerships are very successful. But many end in a lot of trouble. Disasters, broken friendships, broken family relationships. So think long and hard. Document everything to a tee before going into business. I'm Donna Bordeaux with pyopaccounting.com Please follow us on Facebook and Instagram. Make sure you check out our blog and our website from the link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. To contact me, email me at donna at P T Y O P accounting dot com.
