Business Operating Agreement
One of the many plans and paperwork businesses need is a business operating agreement. It is not an analysis nor a report, but acts as both a blueprint (on how businesses should conduct their daily operations) and a contract (all of the members or partners agreeing with the terms and conditions of the blueprint). If you are tasked to create a business operating agreement, here are some business operating agreement examples (in PDF format) to help you. We also included some tips on how to write an effective operating agreement.
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Business Operating Agreement Defined
A business operating agreement is a common document used by limited liability companies (LLC). These types of companies use a structure in which members are not held personally liable for each other’s debts and liabilities. Limited liability companies are a combination of corporations and partnerships/sole proprietorships, as LLCs use a flow through taxation used by partnerships while the limited liability feature is common in corporations.
Basic Elements of a Business Operating Agreement
Whether you are writing an equipment purchase agreement, patent license agreement, general partnership agreement, professional services agreement, or any type of agreement for that matter, they all follow a standard agreement format. Listed below are the basic elements of an agreement that you should incorporate in your own agreement document.
A business operating agreement will revolve around financial and functional decisions (including rules, regulations, and provisions) that the company will be implementing. It also acts as a blueprint in how the company conducts its operations. The document is then agreed upon by all members in the limited liability company, binding them in all the terms and conditions listed in the operating agreement.
A number of states in the United States require all businesses to have a business operating agreement. Business organizations who refuse to create an operating agreement will be subject to state laws.
Agreement title
Every document starts with a title. The agreement title basically indicates what the agreement is all about. Take note to avoid writing a lengthy agreement title for your agreement and should be only two lines maximum. For a business operating agreement, you can always just indicate the name of your company followed by the words “Business Operating Plan” (for example, XYZ Limited Liability Company: Business Operating Agreement) to make it short yet concise.
Date and addresses
Among the basic sections of an agreement are the title, date, and address. Before you start discussing the details of your agreement, you should always start off with those three sections above. List down the date when the agreement was made or when the agreement will be submitted to various company personnel or officers. After that, the name of the company as well as its physical address should also be listed down. If the company operates in two or more business locations, it should also be listed in the agreement as well.
Here is an example you can follow:
XYZ Limited Liability Co. (LLC): Business Operating Agreement
To be submitted for review: January 1, 2018
3rd Floor, Golden Boot Business Center, Autumn Avenue, New York City, New York and 11th Floor, John Doe Corporate Center, William Howard Taft Street, Los Angeles, California
Purpose of the agreement
The purpose of the agreement acts as a summary of your business operating agreement. The main details and content of the agreement will be discussed in the succeeding sections. In this section meanwhile, discuss why the agreement is created and how the agreement benefits the organization both short-term and long-term.
Here is an example that you can follow:
This business operating agreement is created with the purpose of listing down and discussing both the company’s financial and operational goals for the year 2018. All members of the LLC have agreed on the terms and conditions of this operating agreement.
Work to be performed (terms and conditions)
As previously mentioned, the business operating agreement will revolve around financial and functional decisions (including rules, regulations, and provisions) that the company will be implementing. It also acts as a blueprint in how the company conducts its operations. A time frame is also listed in the operating agreement to identify how long the agreement will be functional (for example, if the operating agreement indicates that the agreement will be implemented for six months, then the said agreement should only be used for six months after it has been approved by the management). All of the policies used by the business organization or institution should be listed in the operating agreement.
After all the financial and functional decisions have been laid out, it is time for the members of the LLC to agree on the terms and conditions listed in the operating agreement. A business operating agreement functions similarly to corporate bylaws or a partnership agreement in multi-member LLCs.
The following terms and conditions should also be present in an operating agreement, although not all items are applicable for all companies.
- details of the parties to the agreement
- agreement duration or period
- definitions of key terms used within the agreement
- a description of the goods and/or services that the business will receive or provide
- payment details and dates (including interest if they will be applied to late payments)
- benchmarks and milestones
- damages or penalty provisions
- renegotiation or renewal options
- complaints and dispute resolution process
- termination conditions
- special conditions
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We hope you found this article to be insightful and beneficial when you will be writing your own business operating agreement. A business operating agreement includes numerous provisions and conditions, so be careful when you will be laying out the details when creating the operating agreement. Additionally, make sure to incorporate the basic elements of an operating agreement as mentioned above to make sure the readers and recipients of the agreement will be easily guided (title, date and address, purpose of agreement, work to be performed).
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