When starting a new business venture, many people choose the Limited Liability Company (LLC) structure for its useful blend of personal liability protection and relatively simple organization. However, when forming an LLC with friends or family members, an additional layer of protection becomes essential – an operating agreement.
An operating agreement is a legal document that outlines the ownership structure, management responsibilities, and decision-making processes of an LLC. Think of it as a rulebook for your entity. While not legally required, it serves as a crucial roadmap for navigating the intricacies of running a business. Follow along to learn a few reasons why an operating agreement can be especially helpful when loved ones are involved in your business.
Preventing Conflicts and Misunderstandings
Operating agreements play an important role in preventing conflicts and misunderstandings among LLC members, especially when those members are friends or family members. By clearly defining each member’s rights, responsibilities, and contributions, operating agreements minimize the likelihood of disputes arising from unclear expectations. The last thing you want is to be put in an awkward position with a close friend or family member, and having an operating agreement can make sure everyone has clear expectations.
You can also include provisions determining who will receive your interest in the business when you pass. We have seen scenarios where clients did not have any type of provision like this one, and then the family is left to argue among themselves about who is entitled to what. Having an operating agreement helps you keep the peace.
Establishing a Clear Framework for Decision-Making
Operating agreements establish a clear framework for decision-making within the LLC, ensuring that all members have a voice in the company’s operations. This framework helps prevent power struggles and ensures that major decisions are made in a specific manner. Maybe one family member is good at making financial decisions, while another is more skilled at connecting with your customers on a personal level. It will be helpful for your business to have an established process for decision making so that everyone’s strengths are maximized. This will create a sense of unity and collaboration, and it will prevent anyone from feeling left out of any major decisions.
Addressing Potential Conflicts of Interest
When operating an LLC with friends or family, potential conflicts of interest can arise. Operating agreements address these concerns by outlining procedures for handling conflicts, ensuring that personal relationships don’t overshadow the best interests of the business or prevent the business from securing various opportunities. Again, it’s all about setting expectations so that no one feels left in the dark or singled out if or when a conflict does arise.
Preserving Relationships Beyond Business
While an operating agreement is primarily a legal document, its significance extends beyond the business realm. By addressing potential issues upfront and establishing clear expectations, operating agreements help preserve the personal relationships between friends and family members. You don’t have to choose between your friends or family and your business when you have an operating agreement in place to make sure everything runs smoothly.
Operating agreements are not just legal formalities; they are essential tools for safeguarding relationships between members of the business and ensuring the long-term success of LLCs formed with friends or family members. By establishing clear expectations, addressing potential conflicts, and providing a framework for decision-making, operating agreements ensure harmony and enhance the overall potential for success for your business. If you would like help creating an operating agreement for your own business, schedule a consultation with us today.