Small businesses are created every day across America. The ability for a business to start out in the marketplace with next to nothing and grow into a major enterprise is one of the great things that makes the U.S. an ideal place to start a business.
While there are a number of enterprises that are successful, it is not through lack of growing pains. Indeed, there are a number of things that can go wrong as a small business finds its way. The key is managing (and minimizing) negative experiences.
With that said, a business can successfully navigate these hazards by having a comprehensive operating agreement. This post will highlight some important reasons as to why this is so.
Ownership interest – At the very least, such an agreement must detail what each person’s ownership interest in the business. It may also be helpful to spell out the reasons behind the ownership percentages (i.e. capital investment, management duties).
Rights and responsibilities – The agreement should also detail what each principal’s duties responsibilities will be in managing the business. For example, one member may be responsible for day-to-day operations while another focuses on business development.
Profit and loss sharing – When it comes time to distributing profits or allocating losses (for tax purposes), a detailed plan is necessary so that everyone is on the same page.
Buyout rules – There may be a time where member can no longer help in running the business (because of incapacity, disability or death). When this happens, it is also good to have a plan for how a person can leave the company and cash out their ownership share.