Organizing your company into an LLC among other types of corporations is a sure way to have some peace of mind that your assets are protected from any unexpected circumstances in your business. It also gives you a better chance of protecting the intellectual property of your business as well as attracting key investors to it as they see your business as a serious one.
One of the leading threats to the survival of your business is disputes among the members of the business. Luckily, most of these disputes can be solved by having each partner in your LLC sign an LLC operating agreement. While it is not mandatory to have such an agreement in all states, it helps mitigate foreseeable disputes and set the ground rules for your business.
Here is why you need to have an LLC organization agreement:
The Alternative Is To Use Default State Laws
As you learn how to start an LLC, you are likely to come across the state guidelines for running such companies. This is usually a one-fits-all kind of operating agreement that governs how any LLC will run as long as it doesn’t have its customised agreement. As a result, any disputes within your LLC, as long as you lack a customized agreement, will have to be solved using these generalized rules.
This can end up being a problem in that such generalized rules will do more harm than good when determining how you govern your business, especially since businesses differ in various ways. Instead, it is better to have your own set of ground rules dictating the fate of your business.
Decide On How Dividends Are Shared Out
LLCs, in comparison to C corps and S corps, offer you some form of flexibility when it comes to choosing how you handle your profits and losses. In the latter options, if a person contributed 20% to building the company, they will get the exact percentage regarding dividends. While this might seem fair, it won’t be if the same person does more to run the business when compared to the person who contributed 80%.
Unfortunately, some state guidelines might have the same default rule when it comes to running your LLC. Using your operating agreement, you can decide to offer both participants 50% of the profits or losses to create a fair business environment.
Determine How Decisions Are Made
Some decisions will be the turning point in your business, and predetermining how to make them is a step in the right direction. While some decisions will require a unanimous vote to protect the interests of the members, others will only require the vote of a couple of members. With an operating agreement by your side, making such decisions becomes a walk in the park. For instance, investing in state of the art equipment that might be a little bit expensive should be a decision that involves all the members.
Determine the Business’ Fate If a Member Leaves
A lot can happen within the lifetime of your business. Members can pass away or even voluntarily leave the business. What will happen to the share of the business that they hold?
The last thing your business needs is to start struggling to find the best method for dealing with such a loss. Instead, an operating agreement allows you to set the fate of your business in the early stages. It is also wise to include clauses about what will happen to the business in case one of the members files for bankruptcy or gets divorced to prevent any unwanted outcomes.
The organization of your business should always be a priority to ensure that it runs smoothly. Furthermore, an operating agreement helps to outline the future of your LLC at an early stage. Form a comprehensive agreement to turn your business into a corporation in the right manner.