Startup Operating Agreements: Everything You Need To Know In 5 Minutes

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 looking to make it legit. If you’re serious about doing things the right way, the first thing to do is get an operating agreement. The free startup operating agreements you find online are sometimes inaccurate or don’t do a great job of protecting entrepreneurs’ interests. If you do use a free startup operating agreement, you may find yourself beholden to archaic default business operation laws. So, the best thing to do – and no, I’m not just saying this because I’m a startup business lawyer (well, maybe a little) – is to find a startup business lawyer who can draft a rock-solid operating agreement that protects your interests as far as the law allows.

What should be in a startup operating agreement? Let’s break it down.

What is the purpose of an operating agreement?

Startup operating agreements are meant to protect the people creating the business. That could be just you or a group of people entering into a partnership. If done correctly, an operating agreement decreases 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 onto your shoulders. That new condo you just bought? With an operating agreement, you could find yourself kissing it goodbye.

Once an operating agreement is signed by all parties it is 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” take effect – and state rules are often very unfriendly.

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, Ownership percentages, Voting rights, Individual responsibilities, Powers and duties, Profit distribution, Loss distribution, Meeting schedule, Dissolutionshment plans, Buyout stipulations and Buy-sell rules.

I don’t need a startup operating agreement. Me and my partners are thicker than thieves and can work through anything without an official document?

Do not let yourself fall into the, “but me and my business partners are BFFs” trap. So many people do, and so many people get screwed. It doesn’t matter if you are starting a business with your grandmother; make sure you have an operating agreement in place. It will save you all sorts of headaches in the future.

How long is a typical operating agreement and how much would it cost me to have a lawyer draft one?

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.

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 keeping operating agreement confidential.

The Small Business Administration strongly advises to keep operating agreements confidential. Why? Because they can contain a whole lot of personal information. Now, of course every entity a party to the agreement should understand its parameters, but it’s not something to go shouting off at the mouth about at say, a Scientology recruitment seminar or amongst strangers.

 

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

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