Review of Operating Agreements for Home Business Owners
Most home business owners choose a single member LLC when selecting a business structure, although it is treated as a Sole Proprietorship by the IRS. It is important to establish the business as its own identity. Many think that just having an LLC will do that. That’s simply not true. This is why an Operating Agreement is important for your business.
What does an Operating Agreement do?
The operating agreement details how the company will be managed, how members will be allowed into the company, what kind of accounting software the company will use, and many more details. With this post, I’m going to go through some basic parts of the operating agreement critical for home business owners. The post would be too long to detail every piece of the operating agreement. I encourage you to connect with a business attorney to review your operating agreement, especially if you are partnering with someone else and business.
Who owns the company?
If you’re a single member LLC, ownership is easy. The one owner owns 100% of everything. If you have multiple members, you must detail what percentage each member will own. If every member contributes equally, then the ownership is divided equally. Remember, the LLCs profits and losses are divided among members according to their percentage of contribution. In some cases, members contribute differently – cash, property, or services. If that is your situation, it is imperative that the Operating Agreement detail each members’ contribution, and how that contribution is valued in ownership.
Did I mention there is a bonus gift at the end?
Who is gonna do what?
Duties, rights and responsibilities of each member must be stipulated. Who is in charge of Sales, Finance, Marketing, Administration, etc? The Operating Agreement divides the labor and defines each person’s responsibility. As a single member, you may specify what area you will control and that you will be responsible for hiring individuals to fill certain positions. A single owner may also stipulate that no employees will be hired, and that only independent contractors will perform necessary functions.
What’s with the coming and going?
Although we never really plan to end partnerships, we must plan for partnerships to end. The Operating Agreement will detail how members can leave or new members can be added. Can a member leave voluntarily or will it require a vote? Can a member sell their portion of the company to anyone or must other members be offered the opportunity to buy their shares first? Each state views membership differently, so your operating agreement must comply with state law. Your operating agreement must also specify how a new member is added to the business. Who gets to decide whether or not to take on a new member? Will there be a minimum investment be required? What will the new member’s entitlements be?
Who’s watching the money?
Your Operating Agreement should specify how you will manage your funds. What type of accounting method will you use? What type of accounting software will be used? Will accounting be outsourced? Who will be the primary financial contact? Who can sign Tax Returns? Who can commit the company to a financial agreement? How will distributions be handled?
Who’s gonna be in charge when I’m gone?
This is one of the most overlooked parts of running a business. We assume that we will always be available to run the business. What happens if you get into an accident? Who will run the business? Do you have the required documents in place for that person to step in and take over? As a sole proprietor, your spouse may not have access to the information needed to ‘just step in’. You have to document these details so that your business keeps running, even when you aren’t.
There are so many other details that can go into an Operating Agreement that your head might be spinning right now. No worries! I got you! Grab a copy of the LLC Starter Kit! There’s a sample Operating Agreement in there! Who’s your friend?