Operating Agreement Content/Topics

7 Replies

Hi All,

I'm working on topics to be insert in an operating agreement for a partnership (we are using an attorney, but I want to get a head start) I'll be entering into.  I want to make sure we cover everything.  Any input for additional topics would be most appreciated.

  1. Role definitions and overarching responsibilities:
  2. Contributions and valuation of such:
  3. Distributions:
  4. Exit strategy (or strategies):
  5. Succession in case of illness or death:
  6. Dissolution by mutual agreement:
  7. Dissolution by demand of one partner:

powers and duties, buyout and buy-sell

No substitution of ownership without unanimous consent except in case of death(or not).

No payout of profits without unanimous approval(or not)

What to do about bankruptcy, death, buy out, incapacity, or even disagreement.  

Splitting profits and losses.

Personally I never do partnerships, use an LLC or a sub S corp.

Thank you Maolo and Jerry for your input. We are looking at LLC formation too. Great topics for us to discuss and include.

Best, Kathleen

Glad to see the topic, you also need input from an accountant and tax advisor, I agree with Jerry that an LLC is the better way to go.

Unanimous consent as to members can have tax consequences and is usually the best choice besides keeping all members on a better comfort level. It also may effect the buy-sell and admitting members by law, heirs and assigns.

I suggest being more specific as to describing the purpose and scope of operations, saying to do all things customary and then doing what you think may be customary can venture off into other tax code classifications of business, such as lending, and doing too much of another activity may put you in a different light and acting outside the scope of the primary mission.  Adding that the order of activities is to be inclusive and not as to any emphasis of the order of description of activities may reduce claims as to getting away from the customary business to be conducted.

Need a cut off amount authorizing a manager to incur debt or expense monies in the course of administration without member consent, like $500.00 Someone has to pay the utility bill or buy stationary without making it a board meeting event. Amounts in excess can require consent.

Consider a different class of members, just as preferred and common stockholders, the voting rights do not have to be the same, but do have your attorney check state requirements to this angle. A lower class of membership may allow you to admit members for specific transactions, once the deal is done, they can be removed by consent or limited to time. Yes, this gets more involved, but making an investor a member can be a big plus avoiding lending issues and having to file liens when accounting practices can govern capital contributions to a specific deal.

The Series LLC is not available in all states, there are advantages as to liability inside the entity and between partners, but it can also have other issues requiring all members execute notes, assignments and contingent liabilities when the interests of others are significant to the LLC, a member's cell may be able to conduct its own business and that member may be required to be subsidized in some cases.

Don't forget in the replacement of members to include the refusal to act in a given time period from notice, it's a real pain when the guy just won't act but isn't dead or incapacitated. 

I generally use a forced sale for assets, you obtain two appraisals and sell at the average of the two, provisions of selecting appraisers, time the asset is held. You can get a partner who holds out for a better price and it may not ever sell.

Don't rely on statutes to apply, such as profits as to contributions or replacing an officer or member when that matter is not specifically addressed (I bet most internet docs take this easy way out) each matter should be stipulated IMO, even if it is generally as applied by law when not addressed.

This stuff is worth investigating and deeper consideration, map out your business plan and devise agreements around the big picture and not to just what is to be accomplished but also as to what might be accomplished allowing you to grow and expand. Articles can be amended, but that is just another expense, so make allowances the first time around. :)

@Bill Gulley , great information.  Your feedback prompted me to add quite a few additional "items" to our draft agreement.  What a pain...drafting legal documents is surely not the reason I started this business nor where I want to be spending my time.  How come they never share these topics on HGTV!?  ;-)

Maybe because being in the real estate business isn't as easy as they would like for you to believe! You'll save time and money by allowing others to  do what they do best and better than you do, so see your attorney. :)

@Kathleen Hendricks , @Gregory Tigan , take notes.  What @Bill Gulley has given you in a few minutes of writing is actually better than some lawyers who I know who charge $1,000 just to set an LLC that does not have an operating agreement like what has been shown to you. The basics of a good partnership is preparing for both the expected and the unexpected. Good communication is also key. Be sure to give Bill a vote for his excellent advice, and good luck in your investing.

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