How a Lawyer Can Help You Craft an Operating Agreement for Your Small Business
There are a few standard types of business arrangements for commercial companies and nonprofits. Each of these have unique issues and guidelines for conducting their daily operations. The main types of business structures are:
- A sole proprietorship
- A partnership
- A limited liability company
- A corporation
There are financial, tax, operational, and practical issues that govern which type of business structure is best for your business. For example, for some of these entities, the individuals who run the business pay taxes on any income they earn. For other entities, the business itself (such as a corporation) pays the taxes on profits. The individuals who own the business may or are also required to pay taxes on any personal income they receive.
Operational requirements are generally set forth in written documents. Corporations, even corporations for a single-person business, have a charter and corporate by-laws. These by-laws set forth the written requirements. Partnerships should have a written partnership agreement that sets forth the operational requirements, along with other matters, like the right of a partner to buy out another partner’s interest if a partner dies or retires. Sole proprietorships, such as a small country store, are not required to have operational requirements set forth in writing, though it’s generally a good idea to detail how you run the business in the event you ever want to sell your interest or add a partner.
What are business operational requirements? The following five provisions should be well-considered:
- Decision-making. There should be an understanding of which business decisions require unanimity, which decisions require a majority of the partners, and which decisions each partner can make on his/her own. Decision-making authority could also be placed in the hands of a managing partner.
- Capital contributions. Your operating agreement should detail how much each partner contributes financially to the business, and what happens if the business needs more money. For example, can the partners seek a loan?
- Salaries and compensation. It should be clear when partners can be paid from company profits, as opposed to investing the profits back into the company. The agreement may set forth what percentage of the profits should be used for salaries.
- Business succession issues. Your agreement should set forth what happens in the event a partner dies, retires, or becomes ill. Experienced partnership drafting lawyers review how wills, trusts, and insurance affect these business succession issues and often suggest a buy-sale agreement.
- How the company can be dissolved. This provision should detail what happens if the business isn’t profitable or the partners have unresolvable differences.
There are many other decisions to review, depending on the type of business, the costs to keep the business running, who has the authority to hire employees and contractors, and what funds should be set aside for maintenance.
Additional issues to consider for an operating agreement include:
- The name of business
- The official location of the business
- Identifying the purpose of the business
- Responsibility for record-keeping
- Responsibility for compliance
- The powers of each partner, shareholders, or members
By-laws should provide detailed explanations for many of the day-to-day operational issues that apply to partnerships. Corporations, however, are different than partnerships in many ways, which a skilled business attorney can explain. For example:
- Corporations generally have corporate officers and a board of directors
- Ownership of the corporation is generally based on who owns the various types of stock
- Corporations must comply with state incorporation and state corporate governance issues
At the Law Office of Perry A. Craft PLLC, our Nashville business attorneys have been advising businesses of various sizes and types for more than 40 years. We help you decide the best structure for your business as well as compliance requirements. To discuss your business needs or litigation issues, call the Law Office of Perry A. Craft PLLC at 615-953-3808 or complete our contact form to make an appointment.