“You have to work on the business first before it works for you.”
We’ve been focusing on how to build your company from the ground up — establishing what type of business will suit you best, what you need to get started, and the reasons you are entering your market.
The next step is having your paperwork ready — especially your governing documents.
Essentially, governing documents are all the same – they are just organized differently depending on the entity in which you want to conduct business. For a Limited Liability Company (LLC), the governing agreement is the operating agreement, which combines the elements covered by corporate governing documents, shareholder agreements, buy-sell agreements and the types of issues governed by partnership agreements of all flavors. You will need a qualified lawyer to draft an operating agreement for you and your partners, members and/or shareholders.
You won’t often need one if you plan on opening a sole proprietorship. They typically do not require special registration in any state, beyond the registration of the use of a fictitious name for the business. If you plan to stay away from highly-regulated products and processes — like firearms, pharmaceuticals and food packaging, for example — then you will likewise not need to worry about state or federal interference.
For this discussion, we’ll focus on the agreements for companies with more than one member.
Corporations and S-Corps
The operating documents for corporations and S-Corps are nearly identical if headed by partners. The terms are sufficiently similar, stipulating who owns what percentage of the business and what everyone’s role is. The bylaws and shareholder agreements are also sufficiently similar, but here are some extra tips when drafting the agreement:
- Know your state laws, because corporations function differently from state to state.
- Make sure the company name, along with those of its directors, are clearly stated. People in a rush to get to work can easily overlook this part, especially if they have financial backers who know who to prey on the eager. This exact scenario happened on the new restaurant drama, “Feed The Beast.” It’ll be interesting to watch that unfold on television, but not in reality.
- By the same token, do not list the salaries and distributions for the partners here. Don’t do this for LLCs either, as we’ll discuss shortly, too. Keep distributions flexible to manage cash.
- State which decisions can be made by a board of directors, describe officers’ duties, and the frequency of shareholders and directors meetings.
- List the number and classes of stock you’ll be issuing and remember that S-Corps cannot sell shares to more than 100 members.
- Detail how the business can amend its bylaws. Your will and exit plan is a crucial document here.
Limited Liability Companies
Since an LLC is seen almost as a hybrid between a partnership and a corporation, it combines bylaws, shareholder agreements and buy-sell agreements with a dash of partnership tax data. This establishes the rights and duties which certain members are either entitled to or responsible. Federal and state law refrains from establishing strict requirements on LLC operating agreements intentionally allocating flexibility to members seeking to establish the agreement.
Thankfully, you can customize your agreement and you will likely utilize many of the pointers listed above. This is key because, as our client, you’d need to:
- Protect your control;
- Protect against personal liability for LLC decisions; and
- Achieve your overall goals established at the outset.
Once drafted, an operating agreement is a binding agreement to either a single member, or all members seeking to become part of the LLC. Just as with corporations, certain features must be created at the outset of preparation for possible withdrawal, dissolution, and even a buyout of the LLC.
At Brinen & Associates, we believe that a party to an operating agreement must have all their bases covered. We conduct the proper preparation and due diligence to ensure that clients are protected and can establish companies in alignment with their vision.