When people start businesses, it is natural to focus on the building blocks of the business; including inventory management, product development, business development and talent management. While these are worthy (and ultimately profitable) goals, trying to achieve them without having a management plan may present huge problems in the long run.
As such, this post will highlight a few reasons why a detailed operating agreement is an important piece for the success of your business.
Limiting each partner’s liability – One of the basic reasons for having an operating agreement is to set forth perimeters for each partner (or member’s) liability within the organization. This is critical in protecting one’s personal assets from corporate liability.
Defining ownership rights and management responsibilities – An operating agreement is also necessary to define what each partner’s responsibilities shall be in managing the business. For instance, one member can be responsible for managing and developing business relationships, while another may be responsible for managing in house operations.
Profit and loss rules – An operating agreement can also set forth rules for dividing up the profits after all expenses are accounted for. Essentially, the more a particular member puts into the business, the greater share of the profits that member may stand to receive.
Exit rules – Business relationships, like TV shows and sports teams, don’t last forever. So when a business ends, or a member needs to leave, it is important to have a set of rules to govern how a member may leave the business. After all, a number of disputes can arise when one partner tries to leave and tries to take the majority of the business with him or her.