An operating agreement is used to lay out who owns the company as well as how it will be managed.An operating agreement is similar to a corporate bylaws.The owners should be identified in order to draft the agreement.You need to think about what powers you will give this person and who will manage the daily affairs.When you finish drafting an operating agreement, you should show your draft to a lawyer who can identify any missing information.All members should sign the agreement.
Step 1: Meet your co-owners.
All owners should be involved in the drafting process.You can discuss the details of the operating agreement after reading this article.You could appoint one person to make a rough draft and then circulate it to the other members.
Step 2: You should format your document.
To begin drafting, you should open a blank word processing document and set the style and size of the text.Times New Roman 12 point is acceptable.If you want information to be easy to find in your document, use bolded headings.You might want to set up a table of contents when you're done.The title of the document can be used to create a cover page.There is an operating agreement of sweater styles.
Step 3: You are forming an limited liability company.
In the first section, you need to state that the members agree to the terms and conditions in your operating agreement.The state's laws will govern the company.The parties to this Agreement enter into this Operating Agreement under the MichiganLimited Liability Act and set forth the conditions of their undertaking as Members of the Company in accord with the terms.
Step 4: Define your company's principal place of business.
You always want to know the location of your main place of business.Information about your agent should be included as well.If this information was in your Articles of Organization, you could simply write, "The principal place of business shall be identified in the articles of organization or at a location chosen by the members."
Step 5: The company's purpose should be reported.
You should explain why the company was formed.You might have been created to make and sell sweaters.You can write, "The Company shall conduct any lawful business as deemed appropriate to further the Company's objectives."
Step 6: How long will the company be in existence?
If you want to create an limited liability company for a short period of time, you can.The length of the term should be explained.On June 2, 2016 the Articles of Organization were accepted by the Michigan Department of Licensing and Regulatory Affairs Bureau of Commercial Services.Unless dissolved according to the process provided in the Agreement, the Company will have existence.
Step 7: Key terms are provided with definitions.
The operating agreement is a legal contract and you want to make sure it's clear.You should give a list of definitions for any ambiguous or vague terms.
Step 8: Explain your ownership interest.
Your operating agreement should provide a breakdown of ownership for the owners of an limited liability company.The ownership interest of each co-owner is usually determined by how much they contributed to the startup costs.Anne might have made a contribution to the company.Ben contributed 45%.Anne will have a majority of the company's ownership stake.Any way you want, you can divide the ownership interest.You can attach an exhibit that shows how much each owner contributes to the company.What percent of the limited liability company they own is also identified.
Step 9: Different classes of membership can be created.
Just as a corporation can have different classes of stock, an llc could have differing membership interests.You don't have to create different memberships if you have a small company.There is a membership that is allowed to vote.This group is usually called Membership A.Additional memberships that don't have voting rights can get a share of the profits.They are called Memberships B and C.
Step 10: Do not pay interest.
Interest might be paid on the capital contributed by members.If you want, you can state that no interest will be paid.You could write "No interest will be paid or due by the Company for any capital contributions or advance made by a Member."
Step 11: Explain if capital can be withdrawn.
You can limit the ability of members to remove capital contributions.Members could leave and bankrupt the company if you don't limit them.No Member shall have the right to demand the return of their Capital Contribution or the balance of the Capital Account if you want to limit the withdrawal of capital.There isn't an agreed time when the Capital Contribution will be returned.No Member has the right to demand or receive property in lieu of cash as a return of their Capital Account.
Step 12: How will you accept new members?
It might start small, but it could grow quickly.You might want to consider new members as owners.You need to explain how that will happen.New members can be admitted by a vote of the current members.There is a clause that states that the Company will not admit additional members through issuance of new interest without unanimous written consent of the current Members.
Step 13: Let us know how profits and losses are distributed.
According to their ownership percentage, the owners should share in the profits or losses of the company.Explain how profits and losses will be divided if you want to leave that formula.The Company's net profits or net losses shall be determined annually and allocated to the Members in proportion to their capital interest in the Company.In accordance with the law, this allocation may be amended from time to time.
Step 14: Do you know the rights of members?
Members can vote at meetings and have the right to review the books.You should tell them their rights.If you want to give members the right to inspect the books, you need at least ten days of advance notice.They need to identify why they want to review the books.
Step 15: Explain your voting rights.
There might be five people who have voting rights.You can allocate voting power in a number of ways.There is a provision that explains how voting rights are allocated.You could give each member a single vote.A member's vote could be weighted according to their ownership interest.If one member owns 40% of the company, their vote would count more than someone who owns 5%.
Step 16: Discuss the process of amending the agreement.
If you discover it doesn't work for your company, you might outgrow your operating agreement.You need to change it.How to amend the agreement should be provided.All changes need unanimous consent.You could only require unanimous consent for certain changes, such as compensation, distributions, or the rights of members.Only a majority vote for other changes is required.
Step 17: The initial manager should be named.
The initial manager should be able to serve until your first meeting.How long will this person serve?You could write "The members unanimously elected Marissa Jones as the initial Manager of the Company, who shall serve until her respective successor shall be duly elected."
Step 18: Explain how managers can be elected.
You might want to have more than one manager.You could choose a new manager every year.The process for electing new managers should be stated.
Step 19: List the manager's powers.
The day-to-day operations will be run by your managers.You should list their powers.You should try to be detailed.Give your manager the power to enter contracts that bind the company to be open and maintain bank accounts and other investment accounts, collect money due to the purchase, and use assets for the business, as well as other powers.
Step 20: How can a manager be removed?
Someone who no longer wants to be a manager should resign.The members may need to remove a manager who can no longer do their job.Provisions should be included to explain the process.You could write, "A Manager may resign upon giving at least ninety days' prior written notice to all other Members."A Manager can be removed only for cause, as defined in the employment agreement, and by a majority vote of the Members.
Step 21: How can meetings be called?
Explaining how member meetings can be called is an important reason for an operating agreement.You might want to give the manager the power to call meetings.You could give members the power to call meetings.You could write, "Meetings of the Members shall be held as determined by the Manager or 10% of members."Written notice must be given at least 10 days before the meeting.Only the business in the meeting notice can be transacted.
Step 22: Managers are responsible for their liability.
If you hire a manger, you have to consider whether they are legally liable for their actions.In their employment contract, you can explain this.A clause can be included in your operating agreement.Managers will not be legally responsible for good faith decisions.If they try to harm the company or are careless, they will be held responsible.A Manager who acts in good faith with respect to the Company's business and affairs will not be held responsible for any error of judgment, mistake of law or of fact, or for anything they may have done or refrained.
Step 23: Limit the member's ability to sell their interests.
Some members are not in it for the long haul.A member could decide to sell their interest in the company.You can either set out detailed procedures or limit their ability to sell.They might have to give the other members a chance to purchase the interest first.You could require that the other members give unanimous consent for a new member to purchase the interest and join as a member with voting rights.The new member may only have the right to share in the profits if consent is not given.
Step 24: The process for a member to step down.
You want a member to give you notice that they are leaving.Between 60-90 days in advance, you could require the resigning member to give written notice.Explain what will happen if a member dies.You could state that the company will buy out the deceased's interest in order to pay their heirs.
Step 25: Explain how the company can be dissolved.
Even if you create an limited liability company, it might need to be dissolved.The events that will cause dissolution should be identified.The law requires the company to be dissolved if the members give unanimous written consent.
Step 26: Explain how the assets will be divided.
You will need to wind up the business and distribute any remaining assets when the company shuts down.Explain what will be paid off first.The company's debts and liabilities are paid first, followed by the expenses of liquidating the business.You should give members any remaining assets in proportion to their ownership interest.
Step 27: The governing law should be identified.
If there is a legal dispute, you can go to court.According to the law, the judge must interpret your operating agreement.You can pick which state's law to apply to.If you have a place of business in the state, you should choose the law there.If you have offices in more than one state, you should pick a different state.You should write "The laws of Michigan shall govern the interpretation, application, and construction of this Agreement."
Step 28: A severability clause should be included.
If the operating agreement is found to be illegal, the judge could strike it down.It is possible to prevent that from happening with a severability clause.There is a sample severability clause.If a provision or term is found to be illegal, it will not affect the rest of the Agreement.
Step 29: An integration clause should be added.
There are oral agreements that are not included in the written operating agreement.You should include an integration clause.The entire agreement among the parties pertaining to the subject matter is represented by this Agreement.It supersedes all written and verbal agreements.
Step 30: Your draft should be forwarded to the other owners.
Before showing a draft to an attorney, you want to get feedback from all owners.Give all owners a deadline to make recommendations.The changes should be incorporated into the draft.
Step 31: The draft should be shown to the attorney.
A basic operating agreement is described in this article.Your needs may be different.If your operating agreement is large, then it might need to be more complicated.If you show your draft to an attorney, he will review it and make suggestions.If you don't have an attorney, you can ask for a referral from your local or state bar association.If you need someone to review an operating agreement, call the lawyer.Ask how much it will cost for them to read it.
Step 32: Discuss tax consequences with an accountant
Meeting with an accountant can help you understand the tax consequences of how you distribute profits and losses.Schedule a meeting with a certified public accountant or other tax professional to discuss your options.
Step 33: The final draft needs to be signed by all owners.
To add the words "The undersigned agree and certify to the adoption of this operating agreement", you need to type "Certification of Members" at the top of a separate sheet of paper.
Step 34: Store in your main place of business.
A copy of your operating agreement may be required by your state.You should check with them.You should always keep a copy of the operating agreement at your place of business.