Idaho LLC 4 Things an Operating Agreement Accomplishes

By Lane V. Erickson, Idaho Business Lawyer

We love it when energetic business clients come in with new business ideas! There is always excitement when creating and starting a new business. We enjoy assisting business clients in moving forward to meet their dreams of being business owners. As we help our business clients, we guide them through the process and steps in creating their business. We also provide them with sound legal advice and counsel that helps them look down the road of the future and plan for their business in a way that will help them avoid serious problems. Our goal is to help our clients’ businesses operate smoothly.

At the Racine Law Office, our premiere Idaho business attorneys have been assisting clients for over 70 years in creating and operating their businesses. Many times we help our clients create a limited liability company or LLC for their business. We find that an LLC is ideal for most small businesses because of the legal and financial choices it offers to our clients. In creating an LLC, we always recommend that our clients allow us to help them create a written operating agreement to spell out how the business will be operated.

Most people don’t understand what an operating agreement is. The purpose of this article is to describe what an operating agreement is and how it helps our clients smoothly run their business. At its most basic, an operating agreement is a contract between all of the owners of the business that specifically spells out a number of things. Most importantly, the operating agreement binds all owners of the business to the contract so that there are no misunderstandings about how the business is operated. To help you with understanding more about operating agreements, below is a list of 4 things that an operating agreement accomplishes for a small business.

The first and perhaps most important part of an operating agreement as a contract between the owners is to identify who the actual owners of the business are. Additionally, the operating agreement specifically lists the percentage of ownership that each of the identified owners has in the business operation.

For example, suppose four friends get together to begin an LLC business. In the operating agreement each of the four individual’s names will be listed. Along with their names, the percentage of ownership for each of those owners will be listed. The percentages do not have to be equal. The percentages can be whatever amount each of the parties to the contract are willing to agree to.

Each of the business owners that are listed will sign and date the operating agreement. By signing and dating the agreement, each of the individuals are then bound to the terms and conditions that are spelled out in the specific operating agreement they signed. If at anytime all of the owners of the business decide they want to change the operating agreement they can do it by signing a new one. However, if even one of the original owners refuses to sign a new agreement, then the owners are all bound by the original operating agreement.

The second thing that an operating agreement accomplishes is that it specifically spells out the method for managing the business. When it comes to an LLC, the owners of the business can decide that the business will be managed by all of the owners collectively. If this is the case, the operating agreement will say that management is vested in the managers which includes all of the owners.

However, sometimes owners of a business don’t want to be actively involved in the management of the business. In this circumstance, all of the owners of the business can agree that management of the LLC will be vested with a manager, which could be any of the individual owners. Additionally, the owners could choose to hire an individual as an employee who will manage the business who is not an owner of the business. With all of these options, owners of an LLC have the ultimate in flexibility in determining how their LLC business will be managed.

The next thing that an operating agreement accomplishes is that it specifically spells out the method that owners can use to vote concerning the operation of the business, or specific things they want the business to accomplish.

In the example given above, the owners of the business can each decide that they want to hire an outside manager as an employee to manage the business. If the owners of the business cannot agree on who that manager should be, they have the ability to cast votes based on their percentage of ownership in the business itself. In other words, if there are four owners and each of the owners holds an equal share or 25% of the business, each of the owners would be able to vote their 25%. In this example, if at least three of the owners agree on who the manager should be they can cast their votes and that person will become the manager of the business. However, if only two can agree on who the owner should be and the other two vote for someone else, then there could be a stalemate. The operating agreement can specifically address what happens if there is no majority vote so that all stalemates can be broken and the business can continue to operate.

The fourth thing that an operating agreement can accomplish is to provide specific restrictions concerning how owners of the business can sell or transfer their ownership interests. A few examples here will help illustrate what this means.

Suppose for a moment that there are four owners of the business and each owns a 25% interest. Now suppose that one of the owners dies. In this instance their 25% ownership interest can be transferred by way of a last will and testament or through the laws of intestacy. Regardless of how it is done, that 25% ownership interest will end up in the hands of a different person. The remaining three owners of the business may never have considered that they would be in business with this new person. To protect the business, and the remaining business owners, the operating agreement can state specifically that upon death, either the remaining business owners, or the LLC business itself, has the first right to purchase the ownership interest from the deceased owner’s estate. In this way, the remaining owners can keep a third party from coming in and becoming an owner of the business.

This same restriction, or ability of the business or the remaining business owners to purchase the ownership interest can also apply in the case of a divorce, or bankruptcy, or disability, or if the other business owner simply decides he wants to sell his business share and get out of the business. The operating agreement will specifically spell out how the business or the other business owners can buy the exiting owner’s share.

There are many more things that an operating agreement can do to help protect you and your business. If you have questions about how an operating agreement can help you, we can answer your questions. We have helped numerous business clients create an operating agreement and we are confident that we can help you too!

Our team of Idaho lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.