Startup Operating Agreements: A 5-Minute Overview

A startup operating agreement is an intrical part of your startup's master plan.
A startup operating agreement is an integral part of your startup’s master plan.
Image credit: nexusplexus / 123RF Stock Photo

You’ve got a startup and you’re serious about doing things the right way. So, first things first: Get an operating agreement. Beware of the free startup operating agreements online; they’re often inaccurate or don’t protect entrepreneurs’ interests. If you do use a free startup operating agreement, you may find yourself beholden to problematic provisions.

What is the purpose of an operating agreement?

Startup operating agreements are meant to protect the parties creating a business. If done correctly, they decrease participants’ personal liability and in many circumstances can mitigate a lot of legal red tape.

Also, technically speaking, if you don’t have an operating agreement, you don’t have a legal LLC. Without an official document delineating your business as an entity separate from yourself, all liability falls on your shoulders. That new condo you just bought? Without an operating agreement, you could find yourself kissing it goodbye.

Once an operating agreement is signed by all parties, it’s the guiding doc of the company and binds signatories to its terms.

Another reason to have an operating agreement: If you don’t have one, when conflicts arise, the state “default rules” kick in.

What types of issues are usually addressed in a Startup Operating Agreement?

The typical operating agreements outlines understandings and procedures related to finances, business procedures, operating structures and ownership percentages, voting rights, individual responsibilities, powers and duties, profit distribution, loss distribution, meeting schedule, break-up plans, buyout stipulations, and buy-sell rules.

I don’t need a startup operating agreement. We’re thicker than thieves and can work through anything without an official document?

Do not let yourself fall into the, “but I’m BFFs with my business partners” trap. So many people do, and so many people get toppled. It doesn’t matter if you are starting a business with your grandmother, make sure you have an operating agreement. It’ll save you massive headaches in the future.

How long is a typical operating agreement and how much would it cost?

A startup operating agreement can be anywhere between 1 and 1,000 pages. The length depends on the size of your business, the plan, and your industry. Cost is dependent on the same factors.

Do any states require startups to have an operating agreement?

The federal government and every state government strongly urge every startup to have an operating agreement, but only two states require one – New York and Missouri.

Do you have any parting advice about operating agreements for online startup companies?

The Small Business Administration strongly suggests that operating agreements should remain confidential.

Why?

Because they can contain personal information.

For a more detailed overview of startup operating agreements, head to the Small Business Administration’s website, SBA.gov. If you need an attorney to draft a startup operating agreement, get in touch with Kelly Warner Law today.

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