Part II: 3 Concerns Every Operating Agreement Should Address
Obviously there are more than 3 things that an Operating Agreement must address, including tax allocations, managing capital accounts, organization of meetings, accounting and bank information, confidentiality, and many more. Further, there are other expectations that you should discuss with your partners that may be laid out in other documents, such as your Buy-Sell Agreement. However, there are 3 concerns that business owners must discuss before starting your company are: (1) control; (2) compensation; and (3) ownership.
Who is making the decisions? How will those decisions be made? How will you hold the decision-maker accountable? For each aspect of the business, you must have an end point to a final decision. The end point may be a single person or the requirement of a unanimous decision. Particular people (such as chief officers or particular manager) will make the day-to-day decisions about the operations of the business . However, there are certain decisions that you may want to be unanimous:
- Mergers, Acquisitions, and Consolidations
- Alienation of equity interest
- Dissolution of the company
- Adding a new equity partner/member
- Adding new chief officers/managers
- And perhaps certain impactful financial decisions: if you start paying salaries, if you want to change the company withholding percentage, the amount that should be kept in the slush fund, purchase of an asset over a certain dollar figure, certain decisions about financing/borrowing, etc.
Many people will confuse this with ownership. However, you can own a majority of a company and not be paid (many business owners know how this feels). Alternatively, you may be a small stakeholder, but be well compensated. As such, certain positions or responsibilities may help determine who should be compensated and how. You should always speak with your accountant before finalizing these decisions so you may understand the tax ramifications of these decisions.
Do we split it equally? Should one of us get the majority? When you have an LLC, you can separate out control from ownership very easily. If your Operating Agreement requires a unanimous vote on a decision, then owning 51% of the company doesn’t mean anything with regard to control. Instead, ownership may just have more of an influence on making distributions of profits or losses. Again, talk with your accountant to know the tax consequences.